TESTING FOR LONG-RUN PPP IN A SYSTEM CONTEXT:
EVIDENCE FOR THE US, GERMANY AND JAPAN
University of Ioannina, Department of Economics,
and Bank of Greece, Economic Research Department
The present paper tests for the validity of long-run purchasing power parity (PPP) for the three key currencies of the recent floating exchange rate period, the US dollar, the German mark and the Japanese yen. The novelty of the paper is that the validity of the PPP conditions relating the economies of the US, Germany and Japan is tested in a system framework, which allows for possible interactions in the determination of the exchange rates and the prices of the three economies. Some form of causality among the variables of the system is also assessed empirically with the aid of weak exogeneity tests. The results illustrate the importance of the multilateral testing. Positive evidence for PPP is found: long-run PPP is supported for the US and Germany but also for the US and Japan, in contrast to evidence of earlier empirical studies. In addition, causality is found running from the US prices to the exchange rates and German and Japanese prices.
Keywords: PPP, cointegration, causality.
JEL classification: C32, C52, F31.
I would like to thank Sophoclis Brissimis, Heather Gibson, Nikos Mylonidis, George Tavlas and participants in the 8th International Conference on Macroeconomic Analysis and International Finance, 2004 Rethymno, Crete, for helpful comments and suggestions. The views expressed are the author´s own and do not necessarily represent these of the institutions to which he is affiliated.
Department of Economics
University of Ioannina
45110 Ioannina, Greece
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