 Common trends and generalized purchasing power parityMathematics and Computers in Simulation (MATCOM), 1997, vol. 43, issue 3, 437-443 Abstract: The theory of purchasing power parity (PPP) has worked poorly during the post-Bretton Woods period. We generalize the concept of PPP (called generalized-PPP, or G-PPP) and posit an equilibrium relationship among groups of real exchange rates. The basic tenants of G-PPP are that real fundamental macroeconomic shocks tend to be non-stationary so that the real exchange rates themselves will tend to be non-stationary. Although bilateral exchange rates are non-stationary, they will be cointegrated if the vector of stochastically trending variables has reduced rank. G-PPP will hold within the domain of a currency area since the individual nations will experience a set of common real macroeconomic shocks. Using data from the industrialized countries during the post-Bretton Woods period, we show that G-PPP holds for various groupings of nations. We estimate the long-run equilibrium relationships among the real exchange rates and the short-run dynamics concerning the international transmission of real disturbances. An interesting finding is that G-PPP does not hold among the set of major European nations. The direst implication is that such nations do not constitute the domain of a currency area. Date: 1997 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:43:y:1997:i:3:p:437-443 DOI: 10.1016/S0378-4754(97)00029-3 Access Statistics for this article Mathematics and Computers in Simulation (MATCOM) is currently edited by Robert Beauwens More articles in Mathematics and Computers in Simulation (MATCOM) from Elsevier |
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