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On the transmission of purchasing power parity in a group setting

Author

Listed:
  • Harris Dellas

    (The Karl Brunner Institute, University of Surrey, Federal Reserve Bank of St Louis, and Bank of Greece)

  • Stephen G. Hall

    (Department of Economics, Leicester University, Bank of Greece, and University of St Andrews)

  • George S. Tavlas

    (Bank of Greece and the Hoover Institution, Stanford University)

Abstract

Two characteristics of recent empirical studies on purchasing power parity (PPP) are that they have (1) examined whether PPP holds for individual countries and (2) investigated separately the respective roles of price adjustment and nominal exchange rate adjustment in bringing about PPP, with the magnitude of price adjustment estimated under fixed exchange rate regimes, and the magnitude of nominal exchange rate adjustment estimated under floating rates. We develop an extension of the Johansen reduced rank regression procedure, which we apply in a panel context. This extension allows us to both test the PPP hypothesis and to estimate the adjustment coefficients in a full panel more efficiently than in previous studies which use single-country data. We also extend the PPP model to allow differences between floating and fixed exchange rate regimes to test whether the adjustment process is different in the two regimes.

Suggested Citation

  • Harris Dellas & Stephen G. Hall & George S. Tavlas, 2026. "On the transmission of purchasing power parity in a group setting," Working Papers 368, Bank of Greece.
    • Handle: RePEc:bog:wpaper:368
    DOI: 10.52903/wp2026368
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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