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Purchasing Power Parity When Prices Are I (2)
Author(s) -
Crowder William J.
Publication year - 1996
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1996.tb00099.x
Subject(s) - purchasing power parity , relative purchasing power parity , economics , relative price , float (project management) , exchange rate , econometrics , price level , law of one price , monetary economics , order (exchange) , financial economics , mid price , management , finance
This paper examines the purchasing power parity (PPP) hypothesis over the modern float using data on 15 OECD currencies. Evidence is presented that suggests the price levels evolve as second‐difference stationary processes, i.e., integrated of order two ( P 1 – I (2)). A necessary condition for PPP when prices are I (2) is that prices are cointegrated across countries to an I (1) relative price. In general this relative price is not the same as the simple price ratio. For some of the relationships examined, this relative price level is cointegrated with the exchange rate, implying a long‐run equilibrium between nominal exchange rates and prices.