Purchasing Power Parity Revisited: A Time-Varying Parameter Approach
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.
Volume (Year): 31 (2011)
Issue (Month): 3 ()
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- 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 402-15, June.
- Wallace, Frederick H. & Shelley, Gary L., 2006.
"An alternative test of purchasing power parity,"
Elsevier, vol. 92(2), pages 177-183, August.
- 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, 09.
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