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Financial globalization and purchasing power parity in the G7 countries

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  • Joseph Kargbo

Abstract

Financial globalization has huge opportunities and risks as it transforms supply and demand conditions in various countries. Competent macroeconomic management is needed to address the growing links between national economies and global financial markets. Johansen's cointegration technique was utilized with annual data on exchange rates and four price deflators (e.g. consumer price index, Wholesale Price Index (WPI), food price index and producer price index for manufacturing) to investigate the validity of long-run purchasing power parity in the G7 countries during the 1951 to 2006 period. We found support for purchasing power parity, thereby making it a useful guide for exchange rate policy reforms. Depending on the price index used, adjustment to exchange rate and price shocks take 0.35-8.20 years to return to equilibrium levels.

Suggested Citation

  • Joseph Kargbo, 2009. "Financial globalization and purchasing power parity in the G7 countries," Applied Economics Letters, Taylor & Francis Journals, vol. 16(1), pages 69-74.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:1:p:69-74
    DOI: 10.1080/17446540802360058
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    References listed on IDEAS

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    Cited by:

    1. Pippenger, John, 2022. "The Law Of One Price, Borders And Purchasing Power Parity," University of California at Santa Barbara, Economics Working Paper Series qt5b17d1dr, Department of Economics, UC Santa Barbara.
    2. Arize, Augustine C. & Malindretos, John & Nam, Kiseok, 2010. "Cointegration, dynamic structure, and the validity of purchasing power parity in African countries," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 755-768, October.
    3. Thomas L Bradley & Paul B Eberle, 2023. "Purchasing Power Parity In Russia And The Transitioning Economy 1990-1995," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 31, pages 85-111, June.

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