Purchasing power parity, unit roots, and dynamic structure |
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Authors: | Douglas G. Steigerwald |
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Affiliation: | University of California, Department of Economics, Santa Barbara CA 93106, USA |
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Abstract: | Recent studies of purchasing power parity (PPP) account for the possible presence of unit roots in nominal exchange rates and relative price indices by applying standard unit-root tests to real exchange rates, which are ratios of nominal exchange rates and relative price indices. These studies occasionally find evidence of PPP, but as a whole, the evidence is not definitive. Standard unit-root tests impose a restrictive dynamic structure between nominal exchange rates and relative price indices. I specify and estimate a generalized dynamic structure. I reject the dynamic restrictions implicit in standard unit-root tests of PPP, and find stronger evidence of PPP than do most other recent studies. |
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Keywords: | Purchasing power parity Error correction Unit root |
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