Purchasing Power Parity Revisited: A Time-Varying Parameter Approach

Tarkan Çavuşoğlu and Erdinc Telatar

Economics Bulletin, 2011, vol. 31, issue 3, 2701-2708

Abstract: We re-examine the validity of Purchasing Power Parity (PPP) proposition using Taylor's (2002) data set. Applying the Kalman filter process, our findings not only demonstrate the strong instability in the relationship between the dollar denominated foreign price levels and the US price level, but also rule out the empirical validity of the PPP hypothesis. Thus, we argue that the inference based on the Fisher-Seater methodology cannot account for the Lucas critique in the PPP testing procedure.

Keywords: Purchasing power parity; Fisher-Seater; time-varying parameter; Kalman filter (search for similar items in EconPapers)
JEL-codes: C5 F4 (search for similar items in EconPapers)
Date: 2011-09-21
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Citations: View citations in EconPapers (1)

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