Causal and frequency analyses of purchasing power parity

Jun Nagayasu

Journal of International Financial Markets, Institutions and Money, 2021, vol. 71, issue C

Abstract: A century after its development, the purchasing power parity theorem, which links exchange rates with prices, remains one of the most popular and influential economic theories. This study examines the relationship between exchange rates and prices from the perspectives of causality and spillovers. Using a panel of countries and advanced statistical methods, we estimate spillovers for all combinations of origins and destinations at different frequency bands, and show that their relationship is time-varying and multi-directional and has some validity at short and long time horizons. Furthermore, using exchange rate regimes, economic structures, currency crises, and trade openness, we identify economic conditions influencing the size and direction of spillovers.

Keywords: Purchasing power parity; Spillover; Causality; Data frequency; Variance decomposition; High dimensional vector autoregression (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Causal and Frequency Analyses of Purchasing Power Parity (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:71:y:2021:i:c:s1042443121000068

DOI: 10.1016/j.intfin.2021.101287

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