Long-Run Purchasing Power Parity: Is it for Real?

Ronald R. MacDonald

166 citations0/0 files storedThe Review of Economics and Statistics

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Abstract

In this paper we re-examine the purchasing power \nparity concept using data from the recent experience with \nfloating exchange rates. In particular, we utilise the recently \ndeveloped multivariate cointegration methodology to test for \na long-run relationship between exchange rates and relative \nprices and also to test for the proportionality of the exchange \nrate with respect to relative prices. In contrast to much other \nresearch, we demonstrate that there is a long-run relationship \nbetween a number of bilateral U.S. dollar exchange rates and \ntheir corresponding relative prices. The proportionality of the \nexchange rate to relative prices does not, however, receive \nsupport from the data. This finding may be attributable to the \nuse of measured price series rather than the "true" series.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1988Statistical analysis of cointegration vectors 1990MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY 1986DEVELOPMENTS IN THE STUDY OF COINTEGRATED ECONOMIC VARIABLES 1990Purchasing Power Parity in the Long Run 1992Testing weak exogeneity and the order of cointegration in UK money demand data 1983Deviations from Purchasing Power Parity in the Long Run 1988An empirical examination of long-run purchasing power parity using cointegration techniques

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1999Exchange Rate Behaviour: are Fundamentals Important?1997What Determines Real Exchange Rates? The Long and Short of it 1997Accounting for real and nominal exchange rate movements in the post-Bretton Woods period 2000International Parity Relationships Between Germany and the United States: A Joint Modelling Approach 1999What do We Really Know about Real Exchange Rates?

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