Purchasing Power Parity: Error Correction Models and Structural Breaks

Amalia Zumaquero and Rodrigo Urrea

Open Economies Review, 2002, vol. 13, issue 1, 5-26

Abstract: This paper examines purchasing power parity (PPP) behavior using error correction models (ECM) and allowing for structural breaks. We distinguish four different objectives: first, this paper examines which variable or variables (the exchange rate and/or international relative prices) exhibit a significant error correction mechanism. Second, this paper presents empirical evidence about the adjustment velocity to the long-run equilibrium. Third, it examines the evidence regarding cointegration and the adjustment coefficients parameter instability, and finally, it analyzes whether traded and non-traded sectors exhibit different behavior. The most important results are: (1) the predominant adjustment is in the exchange rate with a larger velocity adjustment than in relative prices; (2) the evidence suggests that when there are strong depreciations or appreciations in the exchange rate, the international relative prices adjust (i.e., there is evidence of pass-through); (3) the dynamic adjustment to equilibrium is, in general, stable. Copyright Kluwer Academic Publishers 2002

Keywords: purchasing power parity; error correction models; multiple structural breaks (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (14)

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DOI: 10.1023/A:1012298028415

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