Purchasing Power Parity as a long-term memory process: evidence from Canada

Jean-Francois Villeneuve and Jagdish Handa

Applied Financial Economics, 2006, vol. 16, issue 1-2, 109-117

Abstract: This paper uses cointegration and fractional cointegration techniques to test for purchasing power parity (PPP) between the Canadian and the US currencies during the floating exchange period from 1974:1 to 2001:12. The focus is on whether the deviations from the cointegrating relationship possess long memory and may be well-described by a fractionally cointegrated process. The Johansen-Juselius procedure does yield an appropriate cointegration vector, thereby supporting PPP as a long-run relationship. However, it is also found that the deviations from PPP do not follow a fractionally cointegrated stationary process, so that PPP at best holds only weakly even in the long run.

Date: 2006
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DOI: 10.1080/0960310052000345831

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