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Testing for long-run PPP in a system context: Evidence for the US, Germany and Japan

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  • Sideris, Dimitrios

Abstract

The present paper tests for the validity of long-run purchasing power parity (PPP) for the three key currencies of the recent floating exchange rate period, the US dollar, the German mark and the Japanese yen. The novelty of the paper is that the validity of the PPP conditions relating the economies of the US, Germany and Japan is tested in a system framework, which allows for possible interactions in the determination of the exchange rates and the prices of the three economies. Some form of causality among the variables of the system is also assessed empirically with the aid of weak exogeneity tests. The results illustrate the importance of the multilateral testing. Positive evidence for PPP is found: long-run PPP is supported for the US and Germany but also for the US and Japan, in contrast to evidence of earlier empirical studies. In addition, causality is found running from the US prices to the exchange rates and German and Japanese prices.
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  • Sideris, Dimitrios, 2006. "Testing for long-run PPP in a system context: Evidence for the US, Germany and Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(2), pages 143-154, April.
    • Handle: RePEc:eee:intfin:v:16:y:2006:i:2:p:143-154
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    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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