IDEAS home Printed from https://ideas.repec.org/a/taf/apeclt/v2y1995i9p316-320.html

Purchasing power parity doctrine: weak and strong form tests

Author

Listed:
  • Swarna Dutt
  • Dipak Ghosh

Abstract

The purchasing power parity hypothesis is investigated within a highly economically integrated set of nations, namely the European Monetary System (EMS). The modern Phillips-Hansen Fully Modified Ordinary Least Squares (FM-OLS) procedure is used, which for the first time allows for an unrestricted cointegration test of the PPP doctrine. It corrects for both endogeneity in the data and asymptotic bias in the coefficient estimates. The entire floating exchange rate period is studied. The weak form (necessary condition) and strong form (necessary and sufficient condition) of PPP are sequentially tested for. The Phillips-Ouliaris non-stationarity test on the exchange rate-price ratio series residuals and the FM-WALD test for the required parameter values are conducted. Across the board evidence is found supporting co-integration between exchange rate and prices, i.e. the necessary condition (weak form PPP) is satisfied, with the sole exception of the Belgian Franc. But the necessary and sufficient condition (strong form PPP) is not supported for any of the currencies.

Suggested Citation

  • Swarna Dutt & Dipak Ghosh, 1995. "Purchasing power parity doctrine: weak and strong form tests," Applied Economics Letters, Taylor & Francis Journals, vol. 2(9), pages 316-320.
    • Handle: RePEc:taf:apeclt:v:2:y:1995:i:9:p:316-320
    DOI: 10.1080/135048595357140
    as

    Download full text from publisher

    File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/135048595357140&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/135048595357140?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 99-125.
    2. Perron, Pierre, 1988. "Trends and random walks in macroeconomic time series : Further evidence from a new approach," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 297-332.
    3. Dutt, Swarna D., 1994. "The foreign exchange market efficiency hypothesis revisiting the puzzle," Economics Letters, Elsevier, vol. 45(4), pages 459-465, August.
    4. Robert Engle & Clive Granger, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    5. Park, Joon Y. & Phillips, Peter C.B., 1988. "Statistical Inference in Regressions with Integrated Processes: Part 1," Econometric Theory, Cambridge University Press, vol. 4(3), pages 468-497, December.
    6. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jeff Hamrick & Murad Taqqu, 2009. "Testing diffusion processes for non-stationarity," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(3), pages 509-551, July.
    2. repec:isu:genstf:201001010800002742 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Swarna Dutt & Dipak Ghosh, 1997. "Are experts' expectations rational? A multicurrency analysis," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 803-812.
    2. Swarna Dutt & Dipak Ghosh, 1994. "An empirical investigation of the export growth-economic growth relationship," Applied Economics Letters, Taylor & Francis Journals, vol. 1(3), pages 44-48.
    3. Luis F. Martins & Paulo M. M. Rodrigues, 2022. "Correction to: Tests for segmented cointegration: an application to US governments budgets," Empirical Economics, Springer, vol. 63(2), pages 601-601, August.
    4. Javier Fernandez-Macho, 2013. "A Test for the Null of Multiple Cointegrating Vectors," Economics Series Working Papers 657, University of Oxford, Department of Economics.
    5. Christou, Christina & Gupta, Rangan & Nyakabawo, Wendy & Wohar, Mark E., 2018. "Do house prices hedge inflation in the US? A quantile cointegration approach," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 15-26.
    6. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    7. Eiji Kurozumi & Yoichi Arai, 2007. "Efficient estimation and inference in cointegrating regressions with structural change," Journal of Time Series Analysis, Wiley Blackwell, vol. 28(4), pages 545-575, July.
    8. Li, Degui & Phillips, Peter C.B. & Gao, Jiti, 2020. "Kernel-based Inference in Time-Varying Coefficient Cointegrating Regression," Journal of Econometrics, Elsevier, vol. 215(2), pages 607-632.
    9. Herzer Dierk, 2022. "Semi-endogenous Versus Schumpeterian Growth Models: A Critical Review of the Literature and New Evidence," Review of Economics, De Gruyter, vol. 73(1), pages 1-55, April.
    10. Peter G. Warr & Frances Wollmer, 1996. "The Demand For Ldc Exports Of Primary Commodities: The Case Of The Philippines," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 40(1), pages 37-49, April.
    11. Pierre Perron & Gabriel Rodríguez, "undated". "Residuals-based Tests for Cointegration with GLS Detrended Data," Boston University - Department of Economics - Working Papers Series wp2015-017, Boston University - Department of Economics, revised 19 Oct 2015.
    12. Arai, Yoichi, 2016. "Testing For Linearity In Regressions With I(1) Processes," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 57(1), pages 111-138, June.
    13. Eleni Constantinou & Avo Kazandjian & Georgios P. Kouretas & Vera Tahmazian, 2008. "Common Stochastic Trends Among The Cyprus Stock Exchange And The Ase, Lse And Nyse," Bulletin of Economic Research, Wiley Blackwell, vol. 60(4), pages 327-349, October.
    14. Rapach, David E. & Wohar, Mark E., 2004. "Testing the monetary model of exchange rate determination: a closer look at panels," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 867-895, October.
    15. Otto, Glenn & Voss, Graham, 1996. "Public Capital and Private Production in Australia," MPRA Paper 52110, University Library of Munich, Germany.
    16. Campos, Julia & Ericsson, Neil R. & Hendry, David F., 1996. "Cointegration tests in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 70(1), pages 187-220, January.
    17. António Miguel Martins & Susana Cró, 2021. "The Impact of Tourism on Solid Waste Generation and Management Cost in Madeira Island for the Period 1996–2018," Sustainability, MDPI, vol. 13(9), pages 1-16, May.
    18. Norah Al-Ballaa, 2005. "Test for cointegration based on two-stage least squares," Journal of Applied Statistics, Taylor & Francis Journals, vol. 32(7), pages 707-713.
    19. Yung-Hsiang Ying & Koyin Chang & Chen-Hsun LEE, 2014. "The Impact of Globalization on Economic Growth," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 25-34, June.
    20. Carlos Alberto Barreto Nieto & Jacobo Campo Robledo, 2012. "Relación a largo plazo entre consumo de energía y PIB en América Latina: Una evaluación empírica con datos panel," Revista Ecos de Economía, Universidad EAFIT.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apeclt:v:2:y:1995:i:9:p:316-320. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEL20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.