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Purchasing Power Parity Revisited: A Time-Varying Parameter Approach

Author

Listed:
  • Tarkan Cavusoglu

    () (Hacettepe University, Department of Public Finance, Beytepe, 06810, Ankara, Turkey)

  • Erdinc Telatar

    () (Hacettepe University, Department of Economics, Beytepe, 06810, Ankara, Turkey)

Abstract

We re-examine the validity of Purchasing Power Parity (PPP) proposition using Taylor's (2002) data set. Applying the Kalman filter process, our findings not only demonstrate the strong instability in the relationship between the dollar denominated foreign price levels and the US price level, but also rule out the empirical validity of the PPP hypothesis. Thus, we argue that the inference based on the Fisher-Seater methodology cannot account for the Lucas critique in the PPP testing procedure.

Suggested Citation

  • Tarkan Cavusoglu & Erdinc Telatar, 2011. "Purchasing Power Parity Revisited: A Time-Varying Parameter Approach," Economics Bulletin, AccessEcon, vol. 31(3), pages 2701-2708.
  • Handle: RePEc:ebl:ecbull:eb-11-00620
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P243.pdf
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    References listed on IDEAS

    as
    1. Wallace, Frederick H. & Shelley, Gary L., 2006. "An alternative test of purchasing power parity," Economics Letters, Elsevier, vol. 92(2), pages 177-183, August.
    2. Mohsen Bahmani-Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less-Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.
    3. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-415, June.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Aviral Tiwari & Muhammad Shahbaz, 2014. "Revisiting Purchasing Power Parity for India using threshold cointegration and nonlinear unit root test," Economic Change and Restructuring, Springer, vol. 47(2), pages 117-133, May.

    More about this item

    Keywords

    Purchasing power parity; Fisher-Seater; time-varying parameter; Kalman filter;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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