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A simple test for PPP among traded goods

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Author Info
Philip Hans Franses
Dick van Dijk

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

Volume (Year): 16 (2006)
Issue (Month): 1-2 (January)
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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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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, Yale University. [Downloadable!]
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