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Co-integration, Error Correction, and Purchasing Power Parity between Canada and the United States

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  • David R. Johnson

Abstract

The concept of cointegration and the associated error-correction representation of a dynamic process (see R. F. Engle and C. W. G. Granger, 1987) is applied to the purchasing power parity relationship between Canada and the United States. The results are supportive of purchasing power parity as a long-run equilibrium relationship between the Canadian dollar/American dollar exchange rate. The purchasing power parity relationship is maintained, although with different dynamic mechanisms, during both fixed and flexible exchange rate regimes.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 23 (1990)
Issue (Month): 4 (November)
Pages: 839-55

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Handle: RePEc:cje:issued:v:23:y:1990:i:4:p:839-55

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Cited by:
  1. Mihir A. Desai & James R. Hines, Jr., 1999. "Excess Capital Flows and the Burden of Inflation in Open Economies," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 235-272 National Bureau of Economic Research, Inc.
  2. Engert, Walter & Hendry, Scott, 1998. "Forecasting Inflation with the M1-VECM: Part Two," Working Papers 98-6, Bank of Canada.
  3. Kawai, Masahiro & Ohara, Hidetaka, 1997. "Nonstationarity of Real Exchange Rates in the G7 Countries: Are They Cointegrated with Real Variables?," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 523-547, December.
  4. Paul Fenton & Alain Paquet, 1997. "International Interest Rate Differentials: The Interaction with Fiscal and Monetary Variables, and the Business Cycle," Cahiers de recherche CREFE / CREFE Working Papers 56, CREFE, Université du Québec à Montréal, revised Jan 1998.
  5. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2011. "PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-sectional Dependency and Structural Breaks," Koç University-TUSIAD Economic Research Forum Working Papers 1135, Koc University-TUSIAD Economic Research Forum.
  6. Hasan, Shahriar & Wallace, Myles, 1996. "Real exchange rate volatility and exchange rate regimes: Evidence from long-term data," Economics Letters, Elsevier, vol. 52(1), pages 67-73, July.
  7. Alan M. Taylor, 2000. "A Century of Purchasing-Power Parity," NBER Working Papers 8012, National Bureau of Economic Research, Inc.
  8. Chiu, Ru-Lin, 2002. "Testing the purchasing power parity in panel data," International Review of Economics & Finance, Elsevier, vol. 11(4), pages 349-362.
  9. Steigerwald, Douglas G., 1996. "Purchasing power parity, unit roots, and dynamic structure," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 343-357, February.
  10. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.

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