Despite the emerging consensus on the validity of purchasing power parity (PPP) between trading countries in the long run, empirical evidence in favour of the PPP theory is scarce in data predominantly exposed to real shocks. This paper tests for PPP between Norway and its trading partners using quarterly observations from the post Bretton Woods period, in which the Norwegian economy has been exposed to numerous real shocks as repeated revaluation of oil and gas resources through new discoveries and price fluctuations. The paper undertakes an extensive examination of the behaviour of the Norwegian real and nominal exchange rates and shows that it is remarkably consistent with the PPP theory. Moreover, convergence towards the equilibrium level appears relatively fast, which is partly ascribed to the Norwegian government`s competitiveness preserving policies and the system of centralised wage bargaining.
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number
030.
Find related papers by JEL classification: C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
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