Do Purchasing Power Parity and Uncovered Interest Rate Parity Hold in the Long Run? - An Example of Likelihood in a Multivariate Time-Series Model

Katarina Juselius

No 93-14, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: The long-run foreign transmission effects are analyzed in a multivariate time-series model of Danish and German prices, exchange rates and interest rates. The analysis of the likelihood function reveals that the vector process is I(2), but that a linear transformation of the prices and the nomical exchange rate removes the I(2) trend from the data. A structural representation of the full cointegration space is found to facilitate the understanding of the interaction between the goods and the capital market and hence the mechanisms behind the inflationary effects transmitted from abroad.

Keywords: VAR model; cointegration; purchasing power parity; uncovered interest rate parity (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
Date: 1993-06

Published in: Journal of Econometrics, vol. 69, no. 1, September 1995, pp. 211-240

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