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A testing of the purchasing power parity hypothesis using a vector autoregressive model

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  • Tatsuyoshi Miyakoshi

Abstract

The paper examines the hypothesis of purchasing power parity relations and the hypothesis of interest rates parity relations between the Japanese yen and the US dollar in a four-dimensional VAR (4-VAR) model, using the statistical technique developed by Johansen and Juselius (1992). The paper demonstrates that the so-called symmetry restriction on the PPP relationship holds not in a 3-VAR model but in the 4-VAR model, which indicates that a correct specification of the sampling distribution of data is important. The interest rates parity relation also holds in the 4-VAR model. The one-step prediction based on the ECM representation with such long-run relations outperforms the random walk model. These results are similar to those under the exchange rate control period (January 1974 to December 1980), which support the inclusion of this period in a whole sample period (January 1974 to December 2001). Copyright Springer-Verlag 2004

Suggested Citation

  • Tatsuyoshi Miyakoshi, 2004. "A testing of the purchasing power parity hypothesis using a vector autoregressive model," Empirical Economics, Springer, vol. 29(3), pages 541-552, September.
    • Handle: RePEc:spr:empeco:v:29:y:2004:i:3:p:541-552
    DOI: 10.1007/s00181-003-0183-3
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    Citations

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    Cited by:

    1. Giorgio Canarella & Stephen Miller & Stephen Pollard, 2014. "Purchasing Power Parity Between the UK and Germany: The Euro Era," Open Economies Review, Springer, vol. 25(4), pages 677-699, September.
    2. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2012. "Purchasing Power Parity between the UK and the Euro Area," Working papers 2012-46, University of Connecticut, Department of Economics.

    More about this item

    Keywords

    PPP; UIP; ECM; prediction; Japan-US; F31;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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