Purchasing Power Parity Revisited: A Time-Varying Parameter Approach
AbstractWe re-examine the validity of Purchasing Power Parity (PPP) proposition using Taylor's (2002) data set. Applying the Kalman filter process, our findings not only demonstrate the strong instability in the relationship between the dollar denominated foreign price levels and the US price level, but also rule out the empirical validity of the PPP hypothesis. Thus, we argue that the inference based on the Fisher-Seater methodology cannot account for the Lucas critique in the PPP testing procedure.
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Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 31 (2011)
Issue (Month): 3 ()
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Purchasing power parity; Fisher-Seater; time-varying parameter; Kalman filter;
Find related papers by JEL classification:
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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- Frederick H. Wallace & Gary L. Shelley, 2005.
"An Alternative Test of Purchasing Power Parity,"
International Finance, EconWPA
- Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 402-15, June.
- Mohsen Bahmani-Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less-Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 23(4), pages 617-658, 09.
- Aviral Tiwari & Muhammad Shahbaz, 2014. "Revisiting Purchasing Power Parity for India using threshold cointegration and nonlinear unit root test," Economic Change and Restructuring, Springer, Springer, vol. 47(2), pages 117-133, May.
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