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Testing long-run purchasing power parity under exchange rate targeting

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  • Brissimis, Sophocles N.
  • Sideris, Dimitris A.
  • Voumvaki, Fragiska K.

Abstract

The present paper exploits the idea that empirical estimates of the long-run PPP relationship may compound two distinct influences coming from the behavior of market participants and policy makers when the latter are targeting the exchange rate. This tends to bias tests of long-run PPP against its acceptance. The validity of the theoretical arguments is assessed by drawing on the experience of two European Union countries, Greece and France for the post-Bretton Woods period. Estimation biases due to the omission of policy effects are found to be significant only in the case of Greece. For France, our test results provide evidence bearing on the effectiveness of the competitive disinflation strategy pursued by the French authorities.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 24 (2005)
Issue (Month): 6 (October)
Pages: 959-981

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Handle: RePEc:eee:jimfin:v:24:y:2005:i:6:p:959-981

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Web page: http://www.elsevier.com/locate/inca/30443

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Cited by:
  1. Hans Genberg, 2006. "Exchange-rate arrangements and financial integration in East Asia: on a collision course?," International Economics and Economic Policy, Springer, vol. 3(3), pages 359-377, December.
  2. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.
  3. Abdalrahman AbuDalu & Elsadig Musa Ahmed, 2013. "The long and short run forcing variables of purchasing power parity of ASEAN-5," E3 Journal of Business Management and Economics., E3 Journals, vol. 4(3), pages 066-081.
  4. Nikolaos Mylonidis & Dimitrios Sideris, 2007. "Home Bias and Purchasing Power Parity: Evidence from the G-7 Countries," Working Papers 59, Bank of Greece.
  5. Katja Funke & Isabell Koske, 2008. "Does the Law of One Price Hold within the EU? A Panel Analysis," International Advances in Economic Research, Springer, vol. 14(1), pages 11-24, February.
  6. Dimitrios A. Sideris, 2007. "Foreign Exchange Intervention and Equilibrium Real Exchange Rates," Working Papers 56, Bank of Greece.
  7. George S. Tavlas & P.A.V.B. Swamy, 2006. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Working Papers 34, Bank of Greece.
  8. Heather D. Gibson & Jim Malley, 2007. "The Contribution of Sectoral Productivity Differentials to Inflation in Greece," Working Papers 2007_39, Business School - Economics, University of Glasgow.
  9. George A. Christodoulakis & Stephen E Satchell, 2006. "Exact Elliptical Distributions for Models of Conditionally Random Financial Volatility," Working Papers 32, Bank of Greece.
  10. Dimitrios Sideris, 2008. "Real Exchange Rates over a Century: The Case of the Drachma/Sterling Rate, 1833-1939," Working Papers 66, Bank of Greece.
  11. Otmar Issing, 2006. "Europe's Hard Fix: The Euro Area," Working Papers 39, Bank of Greece.
  12. 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.

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