Deviations from Purchasing Power Parity

Hung-Gay Fung and Wai-Chung Lo

The Financial Review, 1992, vol. 27, issue 4, 553-70

Abstract: This study uses univariate and multivariate unit root tests to analyze the random walk behavior of real exchange rates for the period 1979-1989. The univariate test fails to reject the random walk model, but the multivariate test indicates that part of the real exchange rates is predictable, a result supporting purchasing power parity. Further analysis of the random walk component in real exchange rates shows that it is quite persistent: for all currencies it takes about five to eight years for this shock to diminish to half its size. Copyright 1992 by MIT Press.

Date: 1992
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