Testing Long-Run Purchasing Power Parity under Exchange Rate Targeting

Sophocles Brissimis, Dimitris Sideris and Fragiska Voumvaki
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Dimitris Sideris: Bank of Greece and University of Ioannina
Fragiska Voumvaki: National Bank of Greece and Athens University of Economics and Business

No 15, Working Papers from Bank of Greece

Abstract: The present paper exploits the idea that empirical estimates of the long-run PPP relationship may compound two distinct influences coming from the behavior of market participants and policy makers when the latter are targeting the exchange rate. This tends to bias tests of long-run PPP against its acceptance. The validity of the theoretical arguments is assessed by drawing on the experience of two European Union countries, Greece and France for the post-Bretton Woods period. Estimation biases due to the omission of policy effects are found to be significant only in the case of Greece. For France, our test results provide evidence bearing on the effectiveness of the competitive disinflation strategy pursued by the French authorities.

Keywords: Long-run PPP; exchange rate targeting; intervention policy; multivariate cointegration (search for similar items in EconPapers)
JEL-codes: C32 F31 F33 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2004-07
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Citations: View citations in EconPapers (6)

Published in Journal of Money and Finance, 2005, 24 (6), pp. 959-981

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