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Purchasing Power Parity When Prices Are I(2)

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  • Crowder, William J

Abstract

This paper examines the purchasing power parity (PPP) hypothesis over the modern float using data on 15 OECD currencies. Evidence is presented that suggests the price levels evolve as second-difference stationary processes, i.e., integrated of order two (P(subscript t) is approximately I(2)). A necessary condition for PPP when prices are I(2) is that prices are cointegrated across countries to an I(1) relative price. In general this relative price is not the same as the simple price ratio. For some of the relationships examined, this relative price level is cointegrated with the exchange rate, implying a long-run equilibrium between nominal exchange rates and prices. Copyright 1996 by Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 4 (1996)
Issue (Month): 2 (June)
Pages: 234-46

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Handle: RePEc:bla:reviec:v:4:y:1996:i:2:p:234-46

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576

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Cited by:
  1. Arize, Augustine C. & Malindretos, John & Nam, Kiseok, 2010. "Cointegration, dynamic structure, and the validity of purchasing power parity in African countries," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 755-768, October.
  2. Henry, Olan T. & Olekalns, Nilss, 2002. "Does the Australian dollar real exchange rate display mean reversion," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 651-666, October.

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