Inflation, Exchange Rates and PPP in a Multivariate Panel Co-Integration Model

22 Pages Posted: 29 Feb 2008

See all articles by Tor Jacobson

Tor Jacobson

Sveriges Riksbank - Research Division

Johan Lyhagen

Uppsala University - Department of Information Science

Rolf Larsson

Stockholm University

Marianne Nessén

Sveriges Riksbank - Research Division

Date Written: 2007-10

Abstract

New multivariate panel co-integration 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 (PPP) 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.

Suggested Citation

Jacobson, Tor and Lyhagen, Johan and Larsson, Rolf and Nessén, Marianne, Inflation, Exchange Rates and PPP in a Multivariate Panel Co-Integration Model (2007-10). Econometrics Journal, Vol. 11, Issue 1, pp. 58-79, February 2008, Available at SSRN: https://ssrn.com/abstract=1100239 or http://dx.doi.org/10.1111/j.1368-423X.2008.00231.x

Tor Jacobson (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0000 (Phone)

HOME PAGE: www.riksbank.com

Johan Lyhagen

Uppsala University - Department of Information Science ( email )

S-751 05 Uppsala
Sweden

Rolf Larsson

Stockholm University ( email )

Department of Statistics
S-106 91 Stockholm
Sweden

Marianne Nessén

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
46 08 787 0000 (Phone)
46 08 21 0531 (Fax)

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