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A simple test for PPP among traded goods

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Author Info
P.H. Franses ()
D.J. van Dijk () (FEW-Econometrie en besliskunde)

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Abstract

The so-called 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. We propose a simple test for PPP among traded goods which can be applied to real exchange rates based on prices of all (that is, both traded and non-traded) goods. We show 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 recent float, we find little evidence in favor 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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Paper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number 255.

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Date of creation: 2002
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Handle: RePEc:dgr:eureir:2002255

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Related research
Keywords: purchasing power parity unit roots unidentified nuisance parameters;

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing

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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. 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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