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Purchasing Power Parities for the DM

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Heri, E., Theurillat, M. Purchasing Power Parities for the DM. . A Cointegration Exercise. Credit and Capital Markets – Kredit und Kapital, 23(3), 333-350. https://doi.org/10.3790/ccm.23.3.333
Heri, Erwin W. and Theurillat, Michael J. "Purchasing Power Parities for the DM. A Cointegration Exercise. " Credit and Capital Markets – Kredit und Kapital 23.3, 1990, 333-350. https://doi.org/10.3790/ccm.23.3.333
Heri, Erwin W./Theurillat, Michael J. (1990): Purchasing Power Parities for the DM, in: Credit and Capital Markets – Kredit und Kapital, vol. 23, iss. 3, 333-350, [online] https://doi.org/10.3790/ccm.23.3.333

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Purchasing Power Parities for the DM

A Cointegration Exercise

Heri, Erwin W. | Theurillat, Michael J.

Credit and Capital Markets – Kredit und Kapital, Vol. 23 (1990), Iss. 3 : pp. 333–350

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Article Details

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Erwin W. Heri, Basel

Michael J. Theurillat, Basel

References

  1. Bernholz, P. / Gaertner, M. / Heri, E. W. (1985): "Historical Experiance with flexible Exchange Rates: A Simulation of Common Qualitative Charakteristics", Journal of International Economics, Vol. 19.  Google Scholar
  2. Bilson, J. F. O. (1976): A Monetary Approach to the Exchange Rate, unpublished Ph. D. Dissertation, University of Chicago.  Google Scholar
  3. Bilson, J. F. O. (1978): "The Monetary Approach to the Exchange Rate: Some Empirical Evidence", IMF-Staff Papers, Vol. 25, 48 - 75.  Google Scholar
  4. Bilson, J. F. O. (1979): "Recent Developments in Monetary Models of Exchange Rate Determination", IMF-Staff Papers, Vol. 26, 201 - 223.  Google Scholar
  5. Branson, W. H. (1977): "Asset Markets and Relative Prices in Exchange Rate Determination", Sozialwissenschaftliche Annalen, Vol.1, 69 - 89. Reprinted in International Finance, No. 20, June 1980.  Google Scholar
  6. Dickey, D. A. / Fuller, W. A. (1981): "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root", Econometrica, Vol. 49, 1057 - 1072.  Google Scholar
  7. Dornbusch, R. (1976): "Expectations and Exchange Rate Dynamics", Journal of Political Economy, Vol. 84, 1161 - 76.  Google Scholar
  8. Dornbusch, R. (1976): "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy", Scandinavian Journal of Economics, Vol. 78, 255 - 275.  Google Scholar
  9. Bernholz, P. / Gaertner, M. / Heri, E. W. (1985): "Historical Experiance with flexible Exchange Rates: A Simulation of Common Qualitative Charakteristics", Journal of International Economics, Vol. 19.  Google Scholar
  10. Bilson, J. F. O. (1976): A Monetary Approach to the Exchange Rate, unpublished Ph. D. Dissertation, University of Chicago.  Google Scholar
  11. Bilson, J. F. O. (1978): "The Monetary Approach to the Exchange Rate: Some Empirical Evidence", IMF-Staff Papers, Vol. 25, 48 – 75.  Google Scholar
  12. Bilson, J. F. O. (1979): "Recent Developments in Monetary Models of Exchange Rate Determination", IMF-Staff Papers, Vol. 26, 201 – 223.  Google Scholar
  13. Branson, W. H. (1977): "Asset Markets and Relative Prices in Exchange Rate Determination", Sozialwissenschaftliche Annalen, Vol.1, 69 – 89. Reprinted in International Finance, No. 20, June 1980.  Google Scholar
  14. Dickey, D. A. / Fuller, W. A. (1981): "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root", Econometrica, Vol. 49, 1057 – 1072.  Google Scholar
  15. Dornbusch, R. (1976): "Expectations and Exchange Rate Dynamics", Journal of Political Economy, Vol. 84, 1161 – 76.  Google Scholar
  16. Dornbusch, R. (1976): "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy", Scandinavian Journal of Economics, Vol. 78, 255 – 275.  Google Scholar

Abstract

The Purchasing Power Theory with Relation to the D-Mark

The purchasing power theory represents one of the probably oldest theoretical components in determining long-term exchange-rate equilibrium. It forms part also of the most recent approaches to the determination of exchange rates as an important equilibrium condition and has thus hardly lost in relevance over time. The present paper analyzes this approach to equilibrium on the basis of the theory of co-integrated processes with regard to its empirical evidence. The introductory (part I and II) throws some light on the exchange rate credo of the last few decades and briefly presents the main characteristics of the theoretical concept underlying the purchasing power parity theory. Moreover, the paper deals with a number of problems involved in such empirical model-building and/or revision.

Part III contains an introductory to the theory of co-integrated time series as developed by Engle and Granger, among others, for reviewing long-term equilibrium relations. Part IV presents and discussed the empirical results of 14 DM-related bilateral exchange rates with a number of important industrialized countries in the period from 1974 to 1987. The results of the co-integration assessment speak in favour of the validity of the purchasing power parity theory in 50% of the cases. It may be interesting in this context that the hypothesis of long-term equilibrium relations within the meaning of the purchasing power parity theory had to be rejected also for the DM/FF rate – with France being Germany's most important partner in the EMS – besides the DM/US-$ and the DM/yen rates enjoying real freedom of float.