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Long-Run Purchasing Power Parity: Is It for Real?

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Author Info
MacDonald, Ronald

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Abstract

In this paper we reexamine the purchasing power parity concept using data from the recent experience with floating exchange rates. In particular, we utilize the recently developed multivariate cointegration methodology to test for a long-run relationship between exchange rates and relative prices and also to test for the proportionality of the exchange rate with respect to relative prices. In contrast to much other research, we demonstrate that there is a long-run relationship between a number of bilateral U.S. dollar exchange rates and their corresponding relative prices. The proportionality of the exchange rate to relative prices does not, however, receive support from the data. This finding may be attributable to the use of measured price series rather than the 'true' series. Copyright 1993 by MIT Press.

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

Volume (Year): 75 (1993)
Issue (Month): 4 (November)
Pages: 690-95
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Handle: RePEc:tpr:restat:v:75:y:1993:i:4:p:690-95

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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. 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)
  4. 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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  5. Bjørnland, Hilde C. & Hungnes, Håvard, 2003. "Fundamental determinants of the long run real exchange rate: The case of Norway," Memorandum 23/2002, Oslo University, Department of Economics. [Downloadable!]
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  6. Ronald MacDonald, 2000. "The role of the exchange rate in economic growth: a euro-zone perspective," Research series 200005-5, National Bank of Belgium. [Downloadable!]
  7. Ping Wang & Paul Dunne, 2000. "Sources of movements in real exchange rates-evidence from east Asian economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(1), pages 158-170, March. [Downloadable!] (restricted)
  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. Georgios P. Kouretas & Leonidas P. Zarangas, 2001. "Long-Run Purchasing Power Parity And Structural Change: The Official And Parallel Foreign Exchange Markets For Dollars In Greece," International Economic Journal, Korean International Economic Association, vol. 15(3), pages 109-128, October. [Downloadable!] (restricted)
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