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Testing for long-run PPP in a system context: Evidence for the US, Germany and Japan

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  • Sideris, Dimitrios

Abstract

The present paper tests for the validity of long-run purchasing power parity (PPP) for the three key currencies of the recent floating exchange rate period, the US dollar, the German mark and the Japanese yen. The novelty of the paper is that the validity of the PPP conditions relating the economies of the US, Germany and Japan is tested in a system framework, which allows for possible interactions in the determination of the exchange rates and the prices of the three economies. Some form of causality among the variables of the system is also assessed empirically with the aid of weak exogeneity tests. The results illustrate the importance of the multilateral testing. Positive evidence for PPP is found: long-run PPP is supported for the US and Germany but also for the US and Japan, in contrast to evidence of earlier empirical studies. In addition, causality is found running from the US prices to the exchange rates and German and Japanese prices.

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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 16 (2006)
Issue (Month): 2 (April)
Pages: 143-154

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Handle: RePEc:eee:intfin:v:16:y:2006:i:2:p:143-154

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Citations

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Cited by:
  1. Hans Genberg, 2006. "Exchange-Rate Arrangements and Financial Integration in East Asia: On a Collision Course?," Working Papers 152006, Hong Kong Institute for Monetary Research.
  2. P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer, vol. 31(2), pages 293-306, May.
  3. Otmar Issing, 2006. "Europe's Hard Fix: The Euro Area," Working Papers 39, Bank of Greece.
  4. Ioannis Theodosiou & Konstantinos Pouliakas, 2005. "Socio-economic differences in the job satisfaction of high-paid and low-paid workers in Greece," Economic Bulletin, Bank of Greece, Economic Research Department, issue 24, pages 83-115, January.
  5. George A. Christodoulakis & Stephen E Satchell, 2006. "Exact Elliptical Distributions for Models of Conditionally Random Financial Volatility," Working Papers 32, Bank of Greece.
  6. Eleni Angelopoulou, 2005. "The Comparative Performance of Q-type and Dynamic Models of Firm Investment: Empirical Evidence from the UK," Working Papers 27, Bank of Greece.
  7. Cushman, David O., 2008. "Long-run PPP in a system context: No favorable evidence after all for the U.S., Germany, and Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 413-424, December.
  8. Panayiotis P. Athanasoglou & Ioannis G. Asimakopoulos & Evangelia A. Georgiou, 2005. "The effect of merger and acquisition announcement on Greek bank stock returns," Economic Bulletin, Bank of Greece, Economic Research Department, issue 24, pages 27-44, January.
  9. Heather D. Gibson, 2005. "Greek Banking Profitability: recent developments," Economic Bulletin, Bank of Greece, Economic Research Department, issue 24, pages 7-25, January.
  10. Theodore Mitrakos & Stauros Zografakis, 2005. "The redistributional impact of inflation in Greece," Economic Bulletin, Bank of Greece, Economic Research Department, issue 24, pages 45-82, January.

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