On the transmission of purchasing power parity in a group setting

Harris Dellas, Stephen Hall and George Tavlas
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Harris Dellas: The Karl Brunner Institute, University of Surrey, Federal Reserve Bank of St Louis, and Bank of Greece
Stephen Hall: Department of Economics, Leicester University, Bank of Greece, and University of St Andrews
George Tavlas: Bank of Greece and the Hoover Institution, Stanford University

No 368, Working Papers from Bank of Greece

Abstract: Two characteristics of recent empirical studies on purchasing power parity (PPP) are that they have (1) examined whether PPP holds for individual countries and (2) investigated separately the respective roles of price adjustment and nominal exchange rate adjustment in bringing about PPP, with the magnitude of price adjustment estimated under fixed exchange rate regimes, and the magnitude of nominal exchange rate adjustment estimated under floating rates. We develop an extension of the Johansen reduced rank regression procedure, which we apply in a panel context. This extension allows us to both test the PPP hypothesis and to estimate the adjustment coefficients in a full panel more efficiently than in previous studies which use single-country data. We also extend the PPP model to allow differences between floating and fixed exchange rate regimes to test whether the adjustment process is different in the two regimes.

Keywords: Purchasing Power Parity; Exchange Rates; panel data; Johansen procedure; fixed exchange rates; floating exchange rates (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 (search for similar items in EconPapers)
Pages: 31
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:bog:wpaper:368

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