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Testing Long-Run Purchasing Power Parity under Exchange Rate Targeting

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  • Sophocles N. Brissimis

    ()
    (Bank of Greece, Economic Research Department and University of Piraeus)

  • Dimitris A. Sideris

    (Bank of Greece and University of Ioannina)

  • Fragiska K. Voumvaki

    (National Bank of Greece and Athens University of Economics and Business)

Abstract

The present paper exploits the idea that empirical estimates of the long-run PPP relationship may compound two distinct influences coming from the behavior of market participants and policy makers when the latter are targeting the exchange rate. This tends to bias tests of long-run PPP against its acceptance. The validity of the theoretical arguments is assessed by drawing on the experience of two European Union countries, Greece and France for the post-Bretton Woods period. Estimation biases due to the omission of policy effects are found to be significant only in the case of Greece. For France, our test results provide evidence bearing on the effectiveness of the competitive disinflation strategy pursued by the French authorities.

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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 15.

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Length: 38 pages
Date of creation: Jul 2004
Date of revision:
Publication status: Published in Journal of Money and Finance, 2005, 24 (6), pp. 959-981
Handle: RePEc:bog:wpaper:15

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Keywords: Long-run PPP; exchange rate targeting; intervention policy; multivariate cointegration;

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Citations

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Cited by:
  1. Otmar Issing, 2006. "Europe's Hard Fix: The Euro Area," Working Papers 39, Bank of Greece.
  2. Abdalrahman AbuDalu & Elsadig Musa Ahmed, 2013. "The long and short run forcing variables of purchasing power parity of ASEAN-5," E3 Journal of Business Management and Economics., E3 Journals, vol. 4(3), pages 066-081.
  3. Nikolaos Mylonidis & Dimitrios Sideris, 2007. "Home Bias and Purchasing Power Parity: Evidence from the G-7 Countries," Working Papers 59, Bank of Greece.
  4. Dimitrios A. Sideris, 2007. "Foreign Exchange Intervention and Equilibrium Real Exchange Rates," Working Papers 56, Bank of Greece.
  5. Eleni Angelopoulou, 2005. "The Comparative Performance of Q-type and Dynamic Models of Firm Investment: Empirical Evidence from the UK," Working Papers 27, Bank of Greece.
  6. George A. Christodoulakis & Stephen E Satchell, 2006. "Exact Elliptical Distributions for Models of Conditionally Random Financial Volatility," Working Papers 32, Bank of Greece.
  7. Heather D. Gibson & Jim Malley, 2007. "The Contribution of Sectoral Productivity Differentials to Inflation in Greee," Working Papers 63, Bank of Greece.
  8. Dimitrios Sideris, 2008. "Real Exchange Rates over a Century: The Case of the Drachma/Sterling Rate, 1833-1939," Working Papers 66, Bank of Greece.
  9. P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer, vol. 31(2), pages 293-306, May.
  10. Hans Genberg, 2006. "Exchange-Rate Arrangements an Financial Integration in East Asia: On a Collision Course?," Working Papers 122, Oesterreichische Nationalbank (Austrian Central Bank).
  11. Katja Funke & Isabell Koske, 2008. "Does the Law of One Price Hold within the EU? A Panel Analysis," International Advances in Economic Research, Springer, vol. 14(1), pages 11-24, February.
  12. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.

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