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Feedback between US and UK Prices: a Frequency Domain Analysis

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Author Info
Jahyeong Koo () (Federal Reserve Bank of Dallas)
Paul A. Johnson () (Vassar College)

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Abstract

This paper decomposes the feedback between US and UK price levels by frequency over the period 1791 to 1990. By adapting Geweke's (1982) method of decomposing the feedback between time series to the case of I(1) time series generated by a bivariate error-correction model, we find that most of the feedback between the two time series occurs at very low frequencies. This result provides a reconciliation of the typical rejection of purchasing power parity (PPP) in short-run studies with the findings of paradoxically short half-lives for deviations from PPP often found in long-run studies.

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File URL: http://www.economicsbulletin.com/2004/volume6/EB-04F40004A.pdf
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Publisher Info
Article provided by Economics Bulletin in its journal Economics Bulletin.

Volume (Year): 6 (2004)
Issue (Month): 17 ()
Pages: 1-9
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Handle: RePEc:ebl:ecbull:v:6:y:2004:i:17:p:1-9

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Related research
Keywords: feedback decomposition; purchasing power parity;

Find related papers by JEL classification:
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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  1. Geweke, John & Meese, Richard, 1981. "Estimating regression models of finite but unknown order," Journal of Econometrics, Elsevier, vol. 16(1), pages 162-162, May. [Downloadable!] (restricted)
    Other versions:
  2. Kenneth A. Froot & Kenneth Rogoff, 1996. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  4. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March. [Downloadable!] (restricted)
  5. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February. [Downloadable!] (restricted)
  6. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June. [Downloadable!] (restricted)
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