Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from Five OECD Countries

Duo Qin ()

No 575, Working Papers from Queen Mary, University of London, Department of Economics

Abstract: This study measures purchasing power parity (PPP) by means of the dynamic-factor errorcorrection model (DF-ECM) approach. Under this new approach, PPP is embedded in latent disequilibrium factors, which are extracted from a large variable set of bilateral price disparities; the factors are then used as error-correction leading indicators to explain exchange rate and inflation. Modelling experiments on five OECD countries using monthly data show promising results, which reverse the common belief that PPP is at best a very long-run relationship at the macro level.

Keywords: Purchasing power parity; Law of one price; Dynamic factor; Error correction (search for similar items in EconPapers)
JEL-codes: F31 C22 C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-ifn
Date: 2006-09

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Related works:
Working Paper: Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from five OECD countries (2007)
Journal Article: Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from Five OECD Countries (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:qmw:qmwecw:wp575

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