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Testing for Purchasing Power Parity using stationary covariates

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  • Jomana Amara
  • David Papell

Abstract

Purchasing Power Parity is tested for in post-Bretton Woods real exchange rate data from 20 developed countries using univariate tests and covariate augmented versions of the Augmented Dickey-Fuller (CADF) and feasible point optimal (CPT) unit root tests. The covariates are a combination of stationary variables - inflation, monetary, income, and current account. A cross method comparison of the results is performed. Very strong evidence is found of PPP using the CPT test, rejecting the unit root null for 12 out of the 20 countries at the 5% significance level or better, and six more at the 10% level. Much less evidence is found of PPP with the CADF and univariate tests.

Suggested Citation

  • Jomana Amara & David Papell, 2006. "Testing for Purchasing Power Parity using stationary covariates," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 29-39.
  • Handle: RePEc:taf:apfiec:v:16:y:2006:i:1-2:p:29-39
    DOI: 10.1080/09603100500389374
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    1. Matthew Higgins & Egon Zakrajsek, 1999. "Purchasing power parity: three stakes through the heart of the unit root null," Staff Reports 80, Federal Reserve Bank of New York.
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