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Purchasing Power Parity: A Time Series Analysis of the U.S. and Mexico, 1995 - 2007

Author

Listed:
  • Steven Yee
  • Miguel Ramirez

    () (Department of Economics, Trinity College)

Abstract

This paper investigates the classic purchasing power parity (PPP) relationship between the United States and Mexico during the 1995 – 2007 period. It utilizes the Johansen and Juselius multivariate cointegration method to test three models for the existence of PPP in both its absolute and relative forms. The first model determines that the ratio of U. S. PPI to Mexican PPI can be treated as a single variable. This provides indirect evidence for absolute PPP in the long run. However, a lack of suitable data in the second model prevents further cointegration tests that could directly examine this relationship. The third model tests for relative PPP by imposing restrictions on both the cointegrating equation and adjustment coefficients of the VECM. It finds that relative PPP holds closely in the long run, but the short run results are ambiguous. Despite the relatively short time span, this paper lays the empirical basis for future tests of PPP between the U.S. and Mexico.

Suggested Citation

  • Steven Yee & Miguel Ramirez, 2015. "Purchasing Power Parity: A Time Series Analysis of the U.S. and Mexico, 1995 - 2007," Working Papers 1508, Trinity College, Department of Economics.
  • Handle: RePEc:tri:wpaper:1508
    as

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    File URL: http://internet2.trincoll.edu/repec/WorkingPapers2015/WP15-08.pdf
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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    3. Miguel Ramirez & Shahryar Khan, 1999. "A cointegration analysis of purchasing power parity: 1973–96," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 5(3), pages 369-385, August.
    4. Jeffrey A. Frankel, 1985. "International capital mobility and crowding-out in the U.S. economy: imperfect integration of financial markets or of goods markets?," Proceedings, Federal Reserve Bank of St. Louis, pages 33-74.
    5. Kim, Yoonbai, 1990. "Purchasing power parity : Another look at the long-run data," Economics Letters, Elsevier, vol. 32(4), pages 339-344, April.
    6. Grether, D M & Nerlove, M, 1970. "Some Properties of 'Optimal' Seasonal Adjustment," Econometrica, Econometric Society, vol. 38(5), pages 682-703, September.
    7. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-273.
    8. Pantula, Sastry G., 1989. "Testing for Unit Roots in Time Series Data," Econometric Theory, Cambridge University Press, vol. 5(02), pages 256-271, August.
    9. Robert A. Blecker, 2003. "The North American Economies After NAFTA : A Critical Appraisal," International Journal of Political Economy, Taylor & Francis Journals, vol. 33(3), pages 5-27.
    10. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    11. Kim, Yoonbai, 1990. "Purchasing Power Parity in the Long Run: A Cointegration Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 491-503, November.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    More about this item

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F30 - International Economics - - International Finance - - - General

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