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Using a VECM to test exogeneity and forecastability in the PPP condition

Stefan Norrbin (), Kevin Reffett and Yaohua Ji

Applied Financial Economics, 1997, vol. 7, issue 1, 87-95

Abstract: The possibility is explored that purchasing power parity (PPP) can be useful in forecasting exchange rates and/or prices. The first step shows that the spot exchange rate is statistically exogenous in the PPP relationship. The next step investigates the forecastability of the variables in the PPP condition. The results show that a VECM can beat a random walk only in the case of the US price level.

Date: 1997
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Handle: RePEc:taf:apfiec:v:7:y:1997:i:1:p:87-95