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PPP over a century: cointegration and structural change

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  • Ekaterini Panopoulou

Abstract

The purpose of this article is to investigate the ability of parameter instability tests in regressions with I(1) processes to discriminate between changes in the cointegrating relationship and in the marginal distribution of the regressors. Using annual data for the G-7 countries and the purchasing power parity (PPP), we conclude that the regression coefficient between the price level differential and the exchange rate has indeed remained stable during the 20th century and find ample evidence supporting the PPP.

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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

Volume (Year): 3 (2007)
Issue (Month): 5 ()
Pages: 319-325

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Handle: RePEc:taf:apfelt:v:3:y:2007:i:5:p:319-325

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  1. Pierre Perron, 2005. "Dealing with Structural Breaks," Boston University - Department of Economics - Working Papers Series WP2005-017, Boston University - Department of Economics.
  2. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  3. Bruce E. Hansen, 1998. "Testing for Structural Change in Conditional Models," Boston College Working Papers in Economics 310., Boston College Department of Economics.
  4. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May.
  5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  6. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
  7. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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