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A simple test for PPP among traded goods

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  • Philip Hans Franses
  • Dick van Dijk

Abstract

The so-called Harrod-Balassa-Samuelson model implies that relative prices of non-traded goods may be nonstationary and, hence, that PPP should preferably be tested on real exchange rates based on prices of traded goods only. A simple test for PPP among traded goods is proposed that can be applied to real exchange rates based on prices of all (that is, both traded and non-traded) goods. The study shows through simulations that the test is reliable for a sample size commonly considered in practice. Upon applying the test to bilateral real exchange rates based on the general CPI among a group of industrialized countries during the post Bretton Woods period, we find little evidence in favour of PPP among traded goods. This does not change when we use real exchange rates based on various components of the CPI.

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Bibliographic Info

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

Volume (Year): 16 (2006)
Issue (Month): 1-2 ()
Pages: 19-27

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Handle: RePEc:taf:apfiec:v:16:y:2006:i:1-2:p:19-27

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References

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Cited by:
  1. Seung Hyun Hong & Peter C. B. Phillips, 2005. "Testing Linearity in Cointegrating Relations with an Application to Purchasing Power Parity," Cowles Foundation Discussion Papers 1541, Cowles Foundation for Research in Economics, Yale University.

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