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Purchasing power parity-symmetry and proportionality: Evidence from 116 countries

Augustine C. Arize, John Malindretos and Dilip Ghosh

International Review of Economics & Finance, 2015, vol. 37, issue C, 69-85

Abstract: This paper examines the cointegration property of exchange rates and prices using techniques that have received limited attention in several studies on the validity of the Purchasing Power Parity (PPP) hypothesis. It provides comprehensive evidence on the PPP hypothesis using recent monthly data for 1971 through 2011 (i.e., 492 observations). The paper also explores the symmetry and proportionality conditions in PPP. In addition, estimates of the short-run dynamics are obtained for each country, utilizing the error–correction technique. Results from long-run cointegration analysis, short-run dynamics and half-lives, all provide evidence for long-run PPP. The symmetry condition is largely supported, and when imposed on prices, the proportionality condition is supported in a majority of cases.

Keywords: PPP; Cointegration; Error correction model (search for similar items in EconPapers)
JEL-codes: C12 C22 F31 F41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.iref.2014.11.014

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