EconPapers    
Economics at your fingertips  
 

Long-Run PPP under the Presence of Near-to-Unit Roots: The Case of the British Pound-US Dollar Rate

Nikitas Pittis (), Christina Christou, Sarantis Kalyvitis () and Christis Hassapis

Review of International Economics, 2009, vol. 17, issue 1, 144-155

Abstract: Empirical tests typically provide evidence that the British pound-US dollar exchange rate and the relative wholesale price index contain exact unit roots and exhibit cointegration. However, the cointegrating vector is significantly different from [1, - 1], thus raising doubts on the validity of the purchasing power parity (PPP) hypothesis. Following Elliott (1998 ), we show that if the exchange rate and relative price series contain near-to-unit roots in the context of a bivariate system, then any inference on the "cointegrating" vector and consequently on PPP, which is based on standard cointegration estimation methods, will be misleading. We then argue that the existing evidence against the PPP hypothesis in the British pound-US dollar market can be attributed to the finite sample bias of the standard cointegration estimators, arising from an endogenous and "nearly" nonstationary regressor. We also show that when robust procedures are employed the evidence favors the PPP hypothesis. Copyright © 2009 The Authors. Journal compilation © Blackwell Publishing Ltd 2009.

Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2008.00809.x link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:reviec:v:17:y:2009:i:1:p:144-155

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0965-7576

Access Statistics for this article

Review of International Economics is currently edited by E. Kwan Choi

More articles in Review of International Economics from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2019-07-22
Handle: RePEc:bla:reviec:v:17:y:2009:i:1:p:144-155