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Purchasing power parity: an empirical study of three EMU countries

  • António Portugal Duarte

    (Faculty of Economics - University of Coimbra & GEMF)

We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-à-vis Germany and Spain, and the case of Spain vis-à-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co-integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union.

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File URL: http://128.118.178.162/eps/it/papers/0505/0505005.pdf
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Paper provided by EconWPA in its series International Trade with number 0505005.

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Length: 22 pages
Date of creation: 05 May 2005
Date of revision:
Handle: RePEc:wpa:wuwpit:0505005
Note: Type of Document - pdf; pages: 22
Contact details of provider: Web page: http://128.118.178.162

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