Cointegration Tests of PPP: Do they also Exhibit Erratic Behaviour?

Guglielmo Maria Caporale and Christoph Hanck

No 1811, CESifo Working Paper Series from CESifo

Abstract: We analyse whether tests of PPP exhibit erratic behaviour (as previously reported by Caporale et al., 2003) even when (possibly unwarranted) homogeneity and proportionality restrictions are not imposed, and trivariate cointegration (stage-three) tests between the nominal exchange rate, domestic and foreign price levels are carried out (instead of stationarity tests on the real exchange rate, as in stage-two tests). We examine the US dollar real exchange rate vis-à-vis 21 other currencies over a period of more than a century, and find that stage-three tests produce similar results to those for stage-two tests, namely the former also behave erratically. This confirms that neither of these traditional approaches to testing for PPP can solve the issue of PPP.

Keywords: Purchasing Power Parity (PPP); real exchange rate; cointegration; stationarity; parameter instability (search for similar items in EconPapers)
JEL-codes: C12 C22 F31 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets, nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Cointegration tests of PPP: do they also exhibit erratic behaviour? (2009)
Working Paper: COINTEGRATION TESTS OF PPP:DO THEY ALSO EXHIBIT ERRATIC BEHAVIOUR? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1811

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