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

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  • Mohammad Hasan

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.

Suggested Citation

  • Mohammad Hasan, 2006. "A century of Purchasing Power Parity: evidence from Canada and Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 145-156.
    • Handle: RePEc:taf:apfiec:v:16:y:2006:i:1-2:p:145-156
    DOI: 10.1080/09603100500390091
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    References listed on IDEAS

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    1. Paul G. J. O'Connell & Shang-Jin Wei, 1997. ""The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged," NBER Working Papers 6089, National Bureau of Economic Research, Inc.
    2. Engle, R. F. & Granger, C. W. J. (ed.), 1991. "Long-Run Economic Relationships: Readings in Cointegration," OUP Catalogue, Oxford University Press, number 9780198283393.
    3. Hargreaves, Colin P. (ed.), 1994. "Non-Stationary Time Series Analysis and Cointegration," OUP Catalogue, Oxford University Press, number 9780198773924.
    4. Hansen, B.E., 1990. "A Powerful, Simple Test For Cointegration Using Cochrane- Orcutt," RCER Working Papers 230, University of Rochester - Center for Economic Research (RCER).
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    Cited by:

    1. Makoto Muto & Yoshitaka Saiki, 2020. "Synchronization analysis between exchange rates on the basis of purchasing power parity using the Hilbert transform," Papers 2010.08825, arXiv.org, revised Aug 2022.
    2. Kyttack Hong & Dong-Hwan Oh, 2009. "Non-Linear Adjustment Process In Won/Dollar And Won/Yen Real Exchage Rates," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(2), pages 111-130, December.
    3. Dimitrios Sideris, 2008. "Real Exchange Rates over a Century: The Case of the Drachma/Sterling Rate, 1833-1939," Working Papers 66, Bank of Greece.

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