Long-run purchasing power parity (PPP): The Caribbean experience, 1973-1993

Author(s): Rambarran, Anston (1995)

Created 22 Jul, 1995
Categories Working Papers
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This paper investigates the validity of the long run PPP for five Caribbean currencies using low frequency data based on the effective exchange rate and effective price concepts. The empirical analysis is grounded in the theory of cointegration, and not only employs the traditional residual based tests of Engle-Granger approach, but also applies the relatively new Johansen test. The results are at best mixed. From the Engle-Grange tests one may tentatively conclude that nominal effective exchange rates and effective price levels are not cointegrated for the five currencies considered, implying that they drift apart from each other over time. The Johansen test results of the trivariate model, however, differ considerably with the evidence of cointegration generally supportive of the long run PPP relationship. Results from the bivariate and univariate models are not as favourable.

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