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Exchange rates and prices: revisiting Granger causality tests

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  • Jen-Chi Cheng
  • Larry Taylor
  • Wenlong Weng

Abstract

This paper examines whether causal relationships exist between exchange rates and prices for the United States and its trading partners: Canada, Germany, Japan, and the United Kingdom. Our empirical methods of focus do not impose the controversial purchasing power parity (PPP) assumption, yet we find that imposing PPP via an error correction system largely confirms our other findings. Our results suggest that exchange rates have Granger caused wholesale prices for all four U.S. trading partners, and there is considerable evidence that the opposite is true for Canada and Japan. In general, we find no causal relationships between consumer prices and exchange rates. Because Granger (non)causality may be due to omitted variables, we discuss this issue in the context of exchange rates and prices.

Suggested Citation

  • Jen-Chi Cheng & Larry Taylor & Wenlong Weng, 2006. "Exchange rates and prices: revisiting Granger causality tests," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(2), pages 259-283.
    • Handle: RePEc:mes:postke:v:29:y:2006:i:2:p:259-283
    DOI: 10.2753/PKE0160-3477290205
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    Cited by:

    1. Chan, Leo & Lien, Donald & Weng, Wenlong, 2008. "Financial interdependence between Hong Kong and the US: A band spectrum approach," International Review of Economics & Finance, Elsevier, vol. 17(4), pages 507-516, October.
    2. Jen-Chi Cheng & Larry Taylor & Wenlong Weng, 2010. "The links between international parity conditions and Granger causality: a study of exchange rates and prices," Applied Economics, Taylor & Francis Journals, vol. 42(27), pages 3491-3501.
    3. Gurgul, Henryk & Lach, Łukasz, 2010. "The causal link between Polish stock market and key macroeconomic aggregates," MPRA Paper 52250, University Library of Munich, Germany.
    4. Henryk Gurgul & Łukasz Lach & Roland Mestel, 2012. "The relationship between budgetary expenditure and economic growth in Poland," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 20(1), pages 161-182, March.

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