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Testing for Long-Run PPP in a System Context: Evidence for the US, Germany and Japan

  • Dimitrios Sideris

    ()

    (Bank of Greece, Economic Research Department and University of Ioannina, Department of Economics)

The present paper tests for the validity of long-run purchasing power parity (PPP) for the three key currencies of the recent floating exchange rate period, the US dollar, the German mark and the Japanese yen. The novelty of the paper is that the validity of the PPP conditions relating the economies of the US, Germany and Japan is tested in a system framework, which allows for possible interactions in the determination of the exchange rates and the prices of the three economies. Some form of causality among the variables of the system is also assessed empirically with the aid of weak exogeneity tests. The results illustrate the importance of the multilateral testing. Positive evidence for PPP is found: long-run PPP is supported for the US and Germany but also for the US and Japan, in contrast to evidence of earlier empirical studies. In addition, causality is found running from the US prices to the exchange rates and German and Japanese prices.

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File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper200419.pdf
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Paper provided by Bank of Greece in its series Working Papers with number 19.

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Length: 20 pages
Date of creation: Nov 2004
Date of revision:
Publication status: Published in Journal of International Financial Markets, Institutions & Money, 2006, 16(2), pp. 143-154
Handle: RePEc:bog:wpaper:19
Contact details of provider: Web page: http://www.bankofgreece.gr

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