Ex Ante Purchasing Power Parity: Some Evidence Based on Vector Autoregressions in the Time Domain

Mark Taylor

Empirical Economics, 1990, vol. 15, issue 1, 77-91

Abstract: The ex ante purchasing power parity (EPPP) hypothesis maintains thatthe expected rate of nomianl exchange rate cepreciaion shuld be equal to the expected inflaiton differential over the relevant period. By modeling the inflaiton differential and the rate ofdepreciaionoas a jointly determed procedss, this paper derives a test of EPPP byu examining the vector autoregrecssive representaiton. We also make allowance fo rthe possibiltiy of conditonal heteroscedasticityinteh inflaitona nd exchagne rate innovations. Our empirical resutls tend to support the EPPP hypothesis.

Date: 1990
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