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Review of World Economics

, Volume 131, Issue 4, pp 673–694 | Cite as

A fractional cointegration approach to empirical tests of PPP: New evidence and methodological implications from an application to the Taiwan/US dollar relationship

  • Rumi Masih
  • Abul M. M. Masih
Articles

Abstract

A Fractional Cointegration Approach to Empirical Tests of PPP: New Evidence and Methodological Implications from an Application to the Taiwan/ US Dollar Relationship. —This paper applies a relatively new concept of fractional cointegration to shed some light on the validity of purchasing power parity as a long-run equilibrium condition, using the Taiwan/US dollar exchange rate. Findings suggest that, while standard tests of cointegration fail to support cointegration between nominal exchange rates, domestic and foreign prices, the fractional cointegration analysis permits deviations from equilibrium to follow a fractionally integrated process and hence captures a much wider class of parity or mean-reversion behaviour. The paper concludes by indicating areas in which fractional cointegration will be a particularly appropriate technique to unearth previously unfounded temporal characteristics.

F31 C22 C52 

Zusammenfassung

Ein neuer Kointegrationsansatz für empirische Tests der Kaufkraftparität. Neue Befunde und methodologische Implikationen aus einer Anwendung auf das Taiwan/US Dollar-Verhältnis. —Die Verfasser benutzen ein relativ neues Konzept der Kointegration (fractional cointegration), um die Gültigkeit der Kaufkraftparität als eine Bedingung des langfristigen Gleichgewichts an Hand des Taiwan/US Dollar-Wechselkurses zu untersuchen. Während die üblichen Kointegrationstests eine Kointegration zwischen nominalen Wechselkursen, heimischen und ausländischen Preisen nicht stützen, erlaubt die neue Kointegrationsanalyse, daβ Abweichungen vom Gleichgewicht auch einem nicht-ganzzahlig integrierten Prozeβ folgen, und erfaβt somit eine viel gröβere Spannbreite von Verhaltensweisen. Am Schluβ des Aufsatzes werden Forschungsgebiete genannt, bei denen der neue Kointegrationsansatz eine besonders zweckmäβige Technik sein wird, um bisher unerklärte Merkmale von Zeitreihen ans Licht zu bringen.

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© Institut fur Weltwirtschaft an der Universitat Kiel 1995

Authors and Affiliations

  • Rumi Masih
  • Abul M. M. Masih

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