Testing Purchasing Power Parity in the Framework of Vector Error Correction Modelling - Financial and Economic Forecasting (Chapter 14)

18 Pages Posted: 30 Jan 2003

See all articles by Jack H.W. Penm

Jack H.W. Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce

Jammie H. Penm

Independent

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management

Date Written: October 2002

Abstract

In this chapter, the necessary condition and the necessary and sufficient condition for purchasing power parity (PPP) are sequentially tested for fourteen bilateral exchange rates. This test is undertaken in the framework of subset vector error correction modelling (VECM) with zero coefficients. This approach is different from the unit root based methods and the results are promising. Of the fourteen exchange rates tested, we find support for the necessary condition for PPP in half of them. The necessary and sufficient condition for PPP is then tested using both a bootstrap procedure and an F test. This condition is consistently accepted for three of the seven exchange rates investigated.

Keywords: Purchasing Power Parity, Vector Error Correction Modelling

JEL Classification: C22, C53, E31

Suggested Citation

Penm, Jack and Penm, Jammie H. and Terrell, R. Deane, Testing Purchasing Power Parity in the Framework of Vector Error Correction Modelling - Financial and Economic Forecasting (Chapter 14) (October 2002). Available at SSRN: https://ssrn.com/abstract=360120 or http://dx.doi.org/10.2139/ssrn.360120

Jack Penm (Contact Author)

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 (02) 61250535 (Phone)
+61 (02) 61250087 (Fax)

Jammie H. Penm

Independent ( email )

61 (02) 62880126 (Phone)
61 (02) 61250087 (Fax)

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management ( email )

Sir Roland Wilson Building (120)
Canberra, Australian Capital Territory 0200
Australia

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