Purchasing Power Parity as a long-term memory process: evidence from Canada
This paper uses cointegration and fractional cointegration techniques to test for purchasing power parity (PPP) between the Canadian and the US currencies during the floating exchange period from 1974:1 to 2001:12. The focus is on whether the deviations from the cointegrating relationship possess long memory and may be well-described by a fractionally cointegrated process. The Johansen-Juselius procedure does yield an appropriate cointegration vector, thereby supporting PPP as a long-run relationship. However, it is also found that the deviations from PPP do not follow a fractionally cointegrated stationary process, so that PPP at best holds only weakly even in the long run.
Volume (Year): 16 (2006)
Issue (Month): 1-2 ()
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