Purchasing Power Parity and Cointegration

  • Tilmann Gerhards
Conference paper


Purchasing power parity (PPP) as a theory of exchange rate determination implies that exchange rate movements are determined by changes of the relative prices between two countries. Absolute purchasing power parity is based on the ‘law of one price’, i.e. the price of one good is the same in two different countries, when denominated in the same currency. Under a number of restrictive assumptions such as perfect competition and substitution on world markets, no transaction costs and aggregated price indices having the same construction and weights, the law of one price does not only hold for a single good but also for aggregated price indices.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Balassa, Bela. 1964. The P-P-P Doctrine: A Reappraisal. Journal of Political Economy, 72, 584–596.CrossRefGoogle Scholar
  2. Box, G.E.P., Jenkins, G.M. 1976. Time Series Analysis: Forecasting and Control. San Francisco: HoldenDay.Google Scholar
  3. Dickey, David A., Fuller, Wayne A. 1979. Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of the American Statistical Association, 74, 427–431.Google Scholar
  4. Dickey, David A., Fuller, Wayne A. 1981. The Likelihood Ratio Statistics for Autoregressive Time Series With a Unit Root. Econometrica, 49, 1057–1072.CrossRefGoogle Scholar
  5. Engle, Robert F., Granger, C.W.J. 1987. Co-integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55, 2, 251–276.CrossRefGoogle Scholar
  6. Granger, C.W.J. 1983. Co-integrated Variables and Error-Correcting Models. UCSD Discussion Paper 83, 13.Google Scholar
  7. Hendry, David F. 1986. Econometric Modelling with Cointegrated Variables: An Overview. Oxford Bulletin of Economics and Statistics, 48, 3, 201–212.CrossRefGoogle Scholar
  8. Nelson, C.R., Plosser, C. 1982. Trends and Random Walk in Macroeconomic Time Series: Some Evidence and Implications. Journal of Monetary Economics, 10, 139–162.CrossRefGoogle Scholar
  9. Phillips, P.C.B. 1985. Understanding Spurious Regressions in Econometrics. Cowles Foundation Discussion Paper, 757.Google Scholar
  10. Stock, James H. 1987. Asymptotic Properties of Least Squares Estimaters of Cointegrating Vectors. Econometrica, 55, 5, 1035–1056.CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 1993

Authors and Affiliations

  • Tilmann Gerhards
    • 1
  1. 1.University of Karlsruhe and SGZ BANK AGKarlsruhe 1Germany

Personalised recommendations