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PPP over a century: cointegration and structural change

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  • Ekaterini Panopoulou

Abstract

The purpose of this article is to investigate the ability of parameter instability tests in regressions with I(1) processes to discriminate between changes in the cointegrating relationship and in the marginal distribution of the regressors. Using annual data for the G-7 countries and the purchasing power parity (PPP), we conclude that the regression coefficient between the price level differential and the exchange rate has indeed remained stable during the 20th century and find ample evidence supporting the PPP.

Suggested Citation

  • Ekaterini Panopoulou, 2007. "PPP over a century: cointegration and structural change," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(5), pages 319-325.
  • Handle: RePEc:taf:apfelt:v:3:y:2007:i:5:p:319-325
    DOI: 10.1080/17446540701222342
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    References listed on IDEAS

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    1. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    2. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
    5. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    6. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    7. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
    8. Pierre Perron, 2005. "Dealing with Structural Breaks," Boston University - Department of Economics - Working Papers Series WP2005-017, Boston University - Department of Economics.
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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