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Advisor(s)
Abstract(s)
Purchasing Power Parity (PPP), as a long run equilibrium condition, is a frequent assumption in open economy macroeconomic models. Hence, given the importance of PPP as a long run determinant of exchange rate behaviour, testing this theory has become a popular exercise. However, traditional tests of PPP are probably not the best method. Cointegration theory, recently developed, provides a more adequate method to test the long run relationships between exchange rates and prices. The purpose of this paper is to test the PPP theory using the Portuguese escudo vis a vis seven currencies, representing Portugal's principal trade partners, namely the Deutsche Mark (DM), the Spanish Peseta (PTA), the French Franc (FF), the Italian Lira (LIT), the United Kingdom Pound (GBP), the Swiss Franc (SFR), the Swedish Krona (SKR) and U.S. Dollar (USD). The remainder of this paper is organised as follows: section one introduces the main theoretical aspects; section two presents the econometric methodology used to test the theory. The empirical results are reported in section three and conclusions are presented at the end of the paper.
Description
Keywords
Open Economy Exchange Rate Cointegration Macroeconomic Models
Pedagogical Context
Citation
Feio, Alexandre M. . JosĆ© Francisco Maria e Rita Netto Duarte . āCointegraĆ§Ć£o tests of PPP: the case of portuguese exchanges ratesā . Instituto Superior de Economia e GestĆ£o .CIEF. Documento de trabalho nĀŗ 13/ 1994