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Colombian Purchasing Power Parity Analysed Using a Framework of Multivariate Cointegration

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  • Peter Rowland

    ()

  • Hugo OLiveros C.

Abstract

This paper tests for purchasing power parity (PPP)between Colombia and its main trading partners using the Johansen framework of multivariate cointegration. The tests shows that PPP does not hold in the strong sense, but a clear purchasing power relationschip is, nevertheless, shown to exist. The model is, furthermore, shown to have significant forecasting power. It outperforms a random walk in out-of sample forecasting on the 12 and 24 month horizont but not on the 3 and 6-month horizon.

Suggested Citation

  • Peter Rowland & Hugo OLiveros C., 2003. "Colombian Purchasing Power Parity Analysed Using a Framework of Multivariate Cointegration," Borradores de Economia 252, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:252
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    References listed on IDEAS

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    1. Leonardo Villar & Hernán Rincón, 2000. "The Colombian Economy In The Nineties: Capital Flows And Foreign Exchange Regimes," BORRADORES DE ECONOMIA 003575, BANCO DE LA REPÚBLICA.
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    6. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    7. Mauricio Cárdenas, 1997. "La tasa de cambio en Colombia," CUADERNOS DE FEDESARROLLO 012740, FEDESARROLLO.
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    9. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
    10. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, December.
    11. 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.
    12. Robert P. Flood & Mark P. Taylor, 1996. "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?," NBER Chapters,in: The Microstructure of Foreign Exchange Markets, pages 261-302 National Bureau of Economic Research, Inc.
    13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    14. Edison, Hali J & Klovland, Jan Tore, 1987. "A Quantitative Reassessment of the Purchasing Power Parity Hypothesis: Evidence from Norway and the United Kingdom," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 2(4), pages 309-333, October.
    15. Ronald Macdonald & Mark P. Taylor, 1992. "Exchange Rate Economics: A Survey," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 1-57, March.
    16. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    17. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-185, May.
    18. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    19. Rudiger Dornbusch, 1985. "Purchasing Power Parity," NBER Working Papers 1591, National Bureau of Economic Research, Inc.
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