A century of Purchasing Power Parity: evidence from Canada and Australia

Mohammad Hasan

Applied Financial Economics, 2006, vol. 16, issue 1-2, 145-156

Abstract: This study empirically examines the Purchasing Power Parity hypothesis using more than a century span of annual data of Australia, Canada and Britain and a battery of unit root tests. The study finds support for the validity of the Purchasing Power Parity hypothesis in the long-run within the framework of both linear and non-linear cointegration tests. The error correction models indicate that it takes four to five years for the short-run deviations from PPP to revert back to the long-run equilibrium. The results also indicate a non-linear mean reversion behaviour in the case of Canada. Overall, the evidence of support for the PPP hypothesis is robust across specifications and testing procedures.

Date: 2006
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DOI: 10.1080/09603100500390091

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