A fractional cointegration analysis of purchasing power parity

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)103-112
Journal / PublicationJournal of Business and Economic Statistics
Volume11
Issue number1
Publication statusPublished - Jan 1993
Externally publishedYes

Abstract

A generalized notion of cointegration, called fractional cointegration, is introduced to examine the long-run purchasing power parity (PPP) hypothesis. By allowing deviations from equilibrium to follow a fractionally integrated process, the fractional cointegration analysis can capture a wider range of mean-reversion behavior than standard cointegration analyses. This gain is flexibility in modeling subtle mean-reverting dynamics is found to be important for a proper evaluation of long-run PPP. Empirical results based on historical data for the 1914-1989 period show that PPP reversion exists and can be characterized by a fractionally integrated process in three out of five countries studied. The results support PPP as a long-run phenomenon, though significant short-run deviations from PPP can exist. © 1993 American Statistical Association.

Research Area(s)

  • Fractional cointegration, Fractional integration, Purchasing power parity