Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model

Tor Jacobson (), Johan Lyhagen (), Rolf Larsson and Marianne Nessen ()
Additional contact information
Tor Jacobson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Rolf Larsson: Department of Information Science, Postal: Division of Statistics, Uppsala University, Box 513, SE-751 20 Uppsala

No 145, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: New multivariate panel cointegration methods are used to analyze nominal exchange rates and prices in four major economies in Europe; France, Germany, Italy and the United Kingdom for the post-Bretton Woods period. We test for purchasing power parity between these four countries and find that the theoretical PPP relationship does not hold. However, the estimated unrestricted relationship is found to be remarkably close to the theoretical one (1,-1.5,0.9 instead of 1,-1,1). Relevant asymptotic results are stated, proved, and evaluated using Monte Carlo simulations. The asymptotic results are general and may hence be used in similar empirical contexts using the same model structure. Parametric bootstrap inference is used in order to deal with test size distortions.

Keywords: Panel data; long-run purchasing power parity; multivariate cointegration analysis; bootstrap inference (search for similar items in EconPapers)
JEL-codes: C15 C32 F30 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2002-12-01
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Inflation, exchange rates and PPP in a multivariate panel cointegration model (2008)
Working Paper: Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model (2002)
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