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Multivariate Cointegration Analysis and the Long-Run Validity of PPP

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Author Info
Kugler, Peter
Lenz, Carlos
Abstract

This paper tests the long-run validity of PPP using Johansen's multivariate cointegration methodology on exchange rates and domestic and foreign price levels. Monthly data covering the recent flexible exchange rate period of the DM vis a vis 15 currencies le ad to the following conclusion: PPP seems to hold in the long run for s ix European currencies: the Pound, Lira, Norwegian Krone, Schilling, Escudo, and Peseta. However, PPP has to be rejected.for the United States and the Canadian Dollar as well as for the Belgian Franc and the Danish Krone. Nevertheless, the authors' analysis is more favorable to PPP as a long-run property of exchange rates than the recent work applying the Engle/Granger regression methodology. Copyright 1993 by MIT Press.

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Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 75 (1993)
Issue (Month): 1 (February)
Pages: 180-84
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Handle: RePEc:tpr:restat:v:75:y:1993:i:1:p:180-84

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  1. Tor Jacobson & Johan Lyhagen & Rolf Larsson & Marianne Nessén, 2002. "Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D4-2, International Conferences on Panel Data. [Downloadable!]
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  2. Barry Falk & Chun-Hsuan Wang, 2003. "Testing long-run PPP with infinite-variance returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 471-484. [Downloadable!]
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  3. Apostolos Serletis, 1994. "Maximum likelihood cointegration tests of purchasing power parity: Evidence from seventeen OECD countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(3), pages 476-493, September. [Downloadable!] (restricted)
  4. Amalia Zumaquero & Rodrigo Urrea, 2002. "Purchasing Power Parity: Error Correction Models and Structural Breaks," Open Economies Review, Springer, vol. 13(1), pages 5-26, January. [Downloadable!] (restricted)
  5. R. Moodley & William Kerr & Daniel Gordon, 2000. "Has the Canada-US trade agreement fostered price integration?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 334-354, June. [Downloadable!] (restricted)
  6. Katarina Juselius, 2007. "The PPP Puzzle: What the Data Tell when Allowed to Speak Freely," Discussion Papers 07-33, University of Copenhagen. Department of Economics, revised Dec 2007. [Downloadable!]
  7. Ronald Macdonald, 1999. "Asset Market and Balance of Payments Characteristics: An Eclectic Exchange Rate Model for the Dollar, Mark and Yen," Open Economies Review, Springer, vol. 10(1), pages 5-29, February. [Downloadable!] (restricted)
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  8. MacDonald, Ronald & Marsh, Ian W, 1999. "Currency Spillovers and Tri-Polarity: A Simultaneous Model of the US Dollar, German Mark and Japanese Yen," CEPR Discussion Papers 2210, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Kausik Chaudhuri & Jeffrey Sheen, . "Purchasing Power Parity Across States and Goods Within Australia," Working Papers 2001-2, University of Sydney, Department of Economics. [Downloadable!]
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