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Testing Long-Run Purchasing Power Parity under Exchange Rate Targeting

  • Sophocles N. Brissimis

    ()

    (Bank of Greece, Economic Research Department and University of Piraeus)

  • Dimitris A. Sideris

    (Bank of Greece and University of Ioannina)

  • Fragiska K. Voumvaki

    (National Bank of Greece and Athens University of Economics and Business)

The present paper exploits the idea that empirical estimates of the long-run PPP relationship may compound two distinct influences coming from the behavior of market participants and policy makers when the latter are targeting the exchange rate. This tends to bias tests of long-run PPP against its acceptance. The validity of the theoretical arguments is assessed by drawing on the experience of two European Union countries, Greece and France for the post-Bretton Woods period. Estimation biases due to the omission of policy effects are found to be significant only in the case of Greece. For France, our test results provide evidence bearing on the effectiveness of the competitive disinflation strategy pursued by the French authorities.

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Paper provided by Bank of Greece in its series Working Papers with number 15.

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Length: 38 pages
Date of creation: Jul 2004
Date of revision:
Publication status: Published in Journal of Money and Finance, 2005, 24 (6), pp. 959-981
Handle: RePEc:bog:wpaper:15
Contact details of provider: Web page: http://www.bankofgreece.gr

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