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Purchasing power parity: an empirical study of three EMU countries

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  • António Portugal Duarte

    (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF)

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:wpa:wuwpif:0505010

Note: Type of Document - pdf; pages: 22
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Web page: http://128.118.178.162

Related research

Keywords: Purchasing Power Parity; Unit Roots; EMU; Economic Integration and Co-integration;

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Cited by:
  1. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.

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