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Purchasing power parity as a long‐run relation
Author(s) -
Patel Jayendu
Publication year - 1990
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950050405
Subject(s) - purchasing power parity , cointegration , economics , econometrics , relation (database) , price index , constraint (computer aided design) , exchange rate , mathematics , monetary economics , computer science , geometry , database
Dickey–Fuller and Stock–Watson tests of purchasing power parity (PPP) as a long‐run proposition are provided within the cointegration framework proposed by Granger. Since different countries use different weights to construct price indices, the traditional constraint that the coefficients on the price indices should be unity in the log‐linear PPP relation is relaxed. The absence of a general PPP relation cannot be rejected. At most, a PPP relation is indicated in five out of fifteen country pairs that are examined. Even if a long‐run PPP relation exists, it is not found to be useful in predicting future nominal exchange rates, which is consistent with efficient speculative markets.