Testing the Validity of Ppp

In: Business and Management

Submitted By nikosbalomenos
Words 10539
Pages 43
Seminar Financial Risk Management 20011-2012 Erasmus University

Testing the validity of Purchasing Power Parity:
In time series and panel analysis using CPI, TPI and PPI.

Supervisor: Everaert Gerdie Leonora Jean-Timothy Marsoufandis-Balomenos Nikolaos Venieris Michael February 10th, 2012 319006 356941 354890

Abstract The examination of the Purchasing power parity theory with reference to 22 (invluding the U.S) countries is the prime objective of the paper. Consumer price index (CPI), whole sale price/producer price index (PPI), traded price index (TPI) and nominal exchange rate are the variables which were investigated in this study for the period 1957Q1-1998Q4, on the basis of the mean reversion hypothesis. Engle-Granger co-integration and Unit root tests have been employed to both of variables and estimated residuals of the sample in order to test the purchasing power parity. Keywords: Purchasing Power Parity, unit-root and co-integration.

Content

1. Introduction……………………………………………………………….….3 2. Literature review………………………………………………………….….4 3. Data……………………………………………………………………………7 4. Methodology………………………………………………………………….8 5. Empirical results………………………………………………………..…....11 5.1. 5.2. 5.3. 5.4. 5.5. Unit-root and cointegration results(CPI)……………………………....11 Unit-root and co-integration results(TPI)……………………………..15 Unit-root and co-integration results(PPI)……………………………..16 Half-life deviations from PPP…………………………………………..17 Forecast performance…………………………………………………...20

6. Robustness……………………………………………………...……………22 7. Conclusion…………………………………………………………………...23 8. References…………………………………………………………………...25 9. Appendix…………………………………………………………………….29

2

1.

Introduction

The validity of Purchasing Power Parity (PPP) model, which is formalized and developed by Gustav Cassel (1920), is the subject of many empirical researches. PPP theory has long serve as one of the…...

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