Purchasing power parity: an empirical study of three EMU countries

António Portugal Duarte

International Trade from University Library of Munich, Germany

Abstract: We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-à-vis Germany and Spain, and the case of Spain vis-à-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co-integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union.

Keywords: Purchasing Power Parity; Unit Roots; EMU; Economic Integration and Co-integration (search for similar items in EconPapers)
JEL-codes: C32 C51 F31 F41 G15 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2005-05-05
New Economics Papers: this item is included in nep-fin
Note: Type of Document - pdf; pages: 22
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Citations: View citations in EconPapers (2)

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Working Paper: Purchasing power parity: an empirical study of three EMU countries (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpit:0505005

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