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Purchasing Power Parity and the Irish Experience: Unit Roots and Cointegration Tests for Two Industrial Countries
Fountas, Stilianos | Wu, Jyh-lin
Credit and Capital Markets – Kredit und Kapital, Vol. 28 (1995), Iss. 2 : pp. 201–215
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Stilianos Fountas, Galway
Jyh-lin Wu, Chia-Yi
References
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Abuaf, N., P. Jorion (1989): Purchasing Power Parity in the Long Run, Journal of Finance, XLV, 157 - 174.
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Callan, T., J. Fitzgerald (1989): Price determination in Ireland: effects of changes in exchange rates and exchange rate regimes, The Economic and Social Review, 20, 165 - 188.
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Abstract
This paper uses unit root/stationarity and cointegration tests to test for Purchasing Power Parity between Ireland and two industrial countries. Using monthly data for the post-1981 period, we show that the PPP relationship holds provided the rejection of the symmetry and proportionality hypotheses can be attributed to measurement errors in price indexes. In particular, PPP against Germany and the associated link of Irish inflation to the German inflation rate, implies that Ireland’s EMS membership has been justified. It is also shown that, in agreement with the small, open economy theory of PPP, the adjustment towards the PPP relationship takes place primarily through changes in the domestic price level.