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Testing Long-Run Purchasing Power Parity under Exchange Rate Targeting

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Author Info
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)

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

Other versions of this item:

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

References listed on IDEAS
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Full references

Cited by:
(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. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
  3. Dimitrios A. Sideris, 2007. "Foreign Exchange Intervention and Equilibrium Real Exchange Rates," Working Papers 56, Bank of Greece. [Downloadable!]
  4. Sven W. Arndt, 2006. "Regional Currency Arrangements in North America," Working Papers 40, Bank of Greece. [Downloadable!]
    Other versions:
  5. George S. Tavlas & P.A.V.B. Swamy, 2006. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Working Papers 34, Bank of Greece. [Downloadable!]
    Other versions:
  6. Hans Genberg, 2006. "Exchange-Rate Arrangements and Financial Integration in East Asia: On a Collision Course?," Working Papers 41, Bank of Greece. [Downloadable!]
    Other versions:
  7. Heather Gibson & Jim Malley, 2008. "The Contribution of Sectoral Productivity Differentials to Inflation in Greece," Open Economies Review, Springer, vol. 19(5), pages 629-650, November. [Downloadable!] (restricted)
    Other versions:
  8. Nikolaos Mylonidis & Dimitrios Sideris, 2008. "Home bias and purchasing power parity: evidence from the G-7 countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 199-204. [Downloadable!]
    Other versions:
  9. Dimitrios Sideris, 2008. "Real Exchange Rates over a Century: The Case of the Drachma/Sterling Rate, 1833-1939," Working Papers 66, Bank of Greece. [Downloadable!]
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