 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. Date: 2009 Downloads: (external link) Related works: 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 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 |
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