Purchasing Power Parity in the Long Run: A Cointegration Approach

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Abstract

This paper utilizes cointegration analysis to examine purchasing power parity relationships over a long-time horizon. The results indicate that the exchange rate is cointegrated strongly with the wholesale price index ratio and somewhat weakly with the consumer price index ratio. The cointegrating coefficient between the exchange rate and the price ratio is close to one when cointegration is confirmed. The hypothesis that the real exchange rate follows a random walk is rejected in most cases. Finally, a new test for common trends finds no such common trends in exchange rates or price ratios. Copyright 1990 by Ohio State University Press.

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