Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 145: Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model
Tor Jacobson (), Johan Lyhagen (), Rolf Larsson and Marianne Nessén ()
Additional contact information
Tor Jacobson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Johan Lyhagen: Department of Information Science, Postal: Division of Statistics, Uppsala University, Box 513, SE-751 20 Uppsala, Sweden
Rolf Larsson: Department of Information Science, Postal: Division of Statistics, Uppsala University, Box 513, SE-751 20 Uppsala
Marianne Nessén: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Abstract: New multivariate panel cointegration methods are used to analyze nominal exchange rates and prices in four major economies in Europe; France, Germany, Italy and the United Kingdom for the post-Bretton Woods period. We test for purchasing power parity between these four countries and find that the theoretical PPP relationship does not hold. However, the estimated unrestricted relationship is found to be remarkably close to the theoretical one (1,-1.5,0.9 instead of 1,-1,1). Relevant asymptotic results are stated, proved, and evaluated using Monte Carlo simulations. The asymptotic results are general and may hence be used in similar empirical contexts using the same model structure. Parametric bootstrap inference is used in order to deal with test size distortions.
Keywords: Panel data; long-run purchasing power parity; multivariate cointegration analysis; bootstrap inference
35 pages, December 1, 2002
Full text files
wp_145.pdf
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