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Cointegration tests of purchasing power parity

  • Wallace, Frederick

In recent work Im, Lee, and Enders (2006) use stationary instrumental variables to test for cointegrating relationships. The advantage of their approach is that the t-statistics are asymptotically standard normal and the familiar critical values of the normal distribution may be used to assess significance. Thus, the test avoids the nuisance parameter problem in single equation regressions for cointegration. Using an updated version of the data set developed by Taylor (2002), the ILE test is compared to three single equation alternatives in testing for purchasing power parity: An error correction model, autoregressive distributed lag model, and the Engle-Granger two step procedure. The regressions with instruments provide evidence supportive of PPP for some countries but the empirical results differ across tests and the choice of instrument can affect the results.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18079.

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Date of creation: 01 Oct 2009
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Handle: RePEc:pra:mprapa:18079
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  1. Kim, Hyeongwoo & Moh, Young-Kyu, 2010. "A century of purchasing power parity confirmed: The role of nonlinearity," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1398-1405, November.
  2. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
  3. Frederick H. Wallace & Rene Lozano Cortes & Luis Fernando Cabrera Castellanos, 2008. "Pruebas de cointegracion de paridad de poder de compra," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 4(2), pages 7-25, Enero-Jun.
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  6. Elena Pesavento, 2005. "Residuals Based Tests for the Null of No Cointegration: An Analytical Comparison," Emory Economics 0503, Department of Economics, Emory University (Atlanta).
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  25. Sarno, Lucio & Valente, Giorgio, 2006. "Deviations from purchasing power parity under different exchange rate regimes: Do they revert and, if so, how?," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3147-3169, November.
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