Purchasing Power Parity: Evidence from a New Test
نویسنده
چکیده
Most economists intuitively consider purchasing power parity (PPP) to be true. Nevertheless, quite surprisingly, the empirical literature is not very supportive for PPP. In this paper, however, we nd evidence in favor of PPP using a new test. The test is embedded in a Markov regime-switching model for the exchange rate, because earlier papers have shown that this model describes the data better than the popular random walk. We allow for PPP by making the regime-switching probabilities depend on the PPP deviation. Our second result is that PPP disequilibria have become shorterlived for some exchange rates, which may be due to an increase in the trade openness of the countries involved. Key words: purchasing power parity, Markov regime-switching, testing, forecasting, exchange rates. JEL classi cation: F31, C52, C53. ¤Correspondence to: Franc Klaassen, Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, the Netherlands; tel: +31-13-4668229; fax: +31-13-4663280; E-mail: [email protected]. I would like to thank Frank de Jong, Harry Huizinga, Bertrand Melenberg, Siem Jan Koopman, Bas Donkers, Herman van Dijk, Herman Bierens, and Casper de Vries for their helpful comments.
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