Purchasing Power Parity as a long-term memory process: evidence from Canada
AbstractThis paper uses cointegration and fractional cointegration techniques to test for purchasing power parity (PPP) between the Canadian and the US currencies during the floating exchange period from 1974:1 to 2001:12. The focus is on whether the deviations from the cointegrating relationship possess long memory and may be well-described by a fractionally cointegrated process. The Johansen-Juselius procedure does yield an appropriate cointegration vector, thereby supporting PPP as a long-run relationship. However, it is also found that the deviations from PPP do not follow a fractionally cointegrated stationary process, so that PPP at best holds only weakly even in the long run.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 16 (2006)
Issue (Month): 1-2 ()
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Web page: http://www.tandfonline.com/RAFE20
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- Luis A. Gil-Alana & Jiang Liang, 2010. "The PPP hypothesis in the US/China relationship. Fractional integration, time variation and data frequency," Faculty Working Papers 13/11, School of Economics and Business Administration, University of Navarra.
- Aloy, Marcel & Boutahar, Mohamed & Gente, Karine & Péguin-Feissolle, Anne, 2011.
"Purchasing power parity and the long memory properties of real exchange rates: Does one size fit all?,"
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- McMillan, David G., 2009. "The confusing time-series behaviour of real exchange rates: Are asymmetries important?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 692-711, October.
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