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Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model

Author

Listed:
  • Tor Jacobson
  • Johan Lyhagen

    (Department of Economic Statistics, Stockholm School of Economics)

  • Rolf Larsson
  • Marianne Nessén
Abstract
New multivariate panel cointegration methods are used to analyze nominal exchange rates and prices in the four major economic powers in Europe, France, Germany, Italy and Great Britain for the post- Bretton Woods period. We test for PPP and find that the theoretical PPP relationship does not hold but there is a similar (1,-1.5,0.9 instead of 1,-1,1) relationship which is common for the investigated countries. Parametric bootstrap inference is used to deal with badly small sample sized tests.

Suggested Citation

  • Tor Jacobson & Johan Lyhagen & Rolf Larsson & Marianne Nessén, 2002. "Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D4-2, International Conferences on Panel Data.
    • Handle: RePEc:cpd:pd2002:d4-2
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

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    2. Brissimis, Sophocles N. & Kosma, Theodora, 2005. "Market power, innovative activity and exchange rate pass-through in the euro area," Working Paper Series 531, European Central Bank.
    3. Gary Koop & Roberto Leon-Gonzalez & Rodney Strachan, 2008. "Bayesian inference in a cointegrating panel data model," Advances in Econometrics, in: Bayesian Econometrics, pages 433-469, Emerald Group Publishing Limited.
    4. Ritesh Kumar Mishra & Sanjay Sehgal, 2011. "Exchange rates and prices in purchasing power parity framework: Are bilateral real exchange rates stationary?," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 4(3), pages 274-286.
    5. Sophocles N. Brissimis & Theodora S. Kosma, 2006. "Market Conduct, Price Interdependence and Exchange Rate Pass-Through," Working Papers 51, Bank of Greece.
    6. Norkutė, Milda & Westerlund, Joakim, 2021. "The factor analytical approach in near unit root interactive effects panels," Journal of Econometrics, Elsevier, vol. 221(2), pages 569-590.
    7. Federico Marongiu, 2004. "Devaluación e Inflacion en Argentina despues de la Convertibilidad," Macroeconomics 0404013, University Library of Munich, Germany.
    8. Didi Nuryadin, 2009. "Real exchange rate and economic fundamental: Empirical study of ASEAN-5," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 1(3), pages 215-230, April.
    9. Laaksonen-Craig, Susanna, 2004. "Foreign direct investments in the forest sector: implications for sustainable forest management in developed and developing countries," Forest Policy and Economics, Elsevier, vol. 6(3-4), pages 359-370, June.
    10. Miguel Carvalho & Paulo Júlio, 2012. "Digging out the PPP hypothesis: an integrated empirical coverage," Empirical Economics, Springer, vol. 42(3), pages 713-744, June.
    11. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
    12. Piotr Kębłowski, 2011. "The Behaviour of Exchange Rates in the Central European Countries and Credit Default Risk Premiums," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 3(4), pages 221-236, December.
    13. Urbain, J.R.Y.J. & Westerlund, J., 2008. "Spurious Regression in Nonstationary Panels time Series with Cross-Member Cointegration," Research Memorandum 044, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    14. In Choi, 2012. "Panel Cointegration," Working Papers 1208, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    15. Johan Lyhagen & Pär Österholm & Mikael Carlsson, 2007. "Testing for Purchasing Power Parity in Cointegrated Panels," IMF Working Papers 2007/287, International Monetary Fund.
    16. Piotr Kębłowski, 2016. "Canonical Correlation Analysis in Panel Vector Error Correction Model. Performance Comparison," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 8(4), pages 203-217, December.

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    More about this item

    Keywords

    Long-run purchasing power parity; multivariate cointegration analysis; bootstrap inference.;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • 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

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