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Purchasing power parity: an empirical study of three EMU countries

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Author Info
António Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF)

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Abstract

We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-à-vis Germany and Spain, and the case of Spain vis-à-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co-integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union.

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Paper provided by EconWPA in its series International Finance with number 0505010.

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Length: 22 pages
Date of creation: 19 May 2005
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Handle: RePEc:wpa:wuwpif:0505010

Note: Type of Document - pdf; pages: 22
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Related research
Keywords: Purchasing Power Parity; Unit Roots; EMU; Economic Integration and Co-integration;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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References listed on IDEAS
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  7. Engel, C., 1996. "Long-Run PPP May Not Hold After All," Working Papers 96-05, University of Washington, Department of Economics.
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  8. Papell, David H., 2002. "The great appreciation, the great depreciation, and the purchasing power parity hypothesis," Journal of International Economics, Elsevier, vol. 57(1), pages 51-82, June. [Downloadable!] (restricted)
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  14. Robert G. Murphy, 1994. "Macroeconomic Policy Implications of Oil in Colombia," Boston College Working Papers in Economics 283., Boston College Department of Economics.
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  18. Ardeni, Pier Giorgio & Lubian, Diego, 1991. "Is there trend reversion in purchasing power parity?," European Economic Review, Elsevier, vol. 35(5), pages 1035-1055, July. [Downloadable!] (restricted)
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  27. Fisher, Eric O'N & Park, Joon Y, 1991. "Testing Purchasing Power Parity under the Null Hypothesis of Co-integration," Economic Journal, Royal Economic Society, vol. 101(409), pages 1476-84, November. [Downloadable!] (restricted)
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