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Econometric methods and purchasing power parity: short- and long-run PPP

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  • Francisco Maeso-Fernandez

Abstract

This paper defines the different versions of the purchasing power parity and establishes the existing relationships between them in the light of econometric techniques. Monthly and annual data for real exchange rates are studied through a variance ratio test. Unlike other authors, it is found that there is not explosive behaviour in the real exchange rate when monthly data are used. Besides, stationarity is easily accepted using annual data. These results allow to reconcile the two main versions of the purchasing power parity and also explain why trade imbalances are persistent but not permanent.

Suggested Citation

  • Francisco Maeso-Fernandez, 1998. "Econometric methods and purchasing power parity: short- and long-run PPP," Applied Economics, Taylor & Francis Journals, vol. 30(11), pages 1443-1457.
  • Handle: RePEc:taf:applec:v:30:y:1998:i:11:p:1443-1457
    DOI: 10.1080/000368498324797
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    Cited by:

    1. Venus Khim-Sen Liew & Kian-Ping Lim & Evan Lau & Chee-Keong Choong, 2003. "Exchange Rate – Relative Price Relationship: Nonlinear Evidence from Malaysia," International Finance 0312001, EconWPA.
    2. António Portugal Duarte, 2005. "Purchasing power parity: an empirical study of three EMU countries," International Finance 0505010, EconWPA.
    3. Yihui Lan, 2001. "The Explosion of Purchasing Power Parity," Economics Discussion / Working Papers 01-22, The University of Western Australia, Department of Economics.
    4. Venus Khim-Sen Liew & Chee-Keong Choong & Evan Lau & Kian-Ping Lim, 2005. "Exchange Rate – Relative Price Nonlinear Cointegration Relationship in Malaysia," Economics Bulletin, AccessEcon, vol. 6(11), pages 1-16.
    5. repec:ebl:ecbull:v:6:y:2005:i:11:p:1-16 is not listed on IDEAS
    6. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-498, March.

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