https://doi.org/10.52903/wp2026368
ON THE TRANSMISSION OF PURCHASING POWER PARITY IN A GROUP SETTING
Harris Dellas
The Karl Brunner Institute, University of Surrey, Federal Reserve Bank of St Louis, and Bank of Greece
Stephen G. Hall
Department of Economics, Leicester University, Bank of Greece,
and University of St Andrews
George S. Tavlas
Bank of Greece and the Hoover Institution, Stanford University
ABSTRACT
Two characteristics of recent empirical studies on purchasing power parity (PPP) are that they have (1) examined whether PPP holds for individual countries and (2) investigated separately the respective roles of price adjustment and nominal exchange rate adjustment in bringing about PPP, with the magnitude of price adjustment estimated under fixed exchange rate regimes, and the magnitude of nominal exchange rate adjustment estimated under floating rates. We develop an extension of the Johansen reduced rank regression procedure, which we apply in a panel context. This extension allows us to both test the PPP hypothesis and to estimate the adjustment coefficients in a full panel more efficiently than in previous studies which use single-country data. We also extend the PPP model to allow differences between floating and fixed exchange rate regimes to test whether the adjustment process is different in the two regimes.
JEL-classifications: C32; E52; E58
Keywords: Purchasing Power Parity; Exchange Rates; panel data; Johansen procedure; fixed exchange rates; floating exchange rates
Acknowledgments: We are grateful to Joscha Beckman, Mark Spiegel, and other participants at the 30th International Conference on Macroeconomic Analysis and International Finance held at the University of Crete in Rethymno, Crete, on May 27-30, 2026, for very helpful comments on an earlier version of this paper. We thank Elisavet Bosdelekidou and Maria Monopoli for research assistance. The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece or the Eurosystem.
Correspondence:
George Tavlas
Bank of Greece,
21 E. Venizelos Ave., Athens, 102 50, Greece
Tel. no. +30 210 320 2370
email: gtavlas@bankofgreece.gr