Publication:
A fractional cointegration approach to empirical tests of PPP: new evidence and methodological implications from an application to the Taiwan/US dollar relationship
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Date
1995
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Abstract
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.
Keywords
Fractional cointegration , Purchasing power parity (PPP) , Taiwan , US Dollar
Citation
Masih, Rumi and Mohammed Masih, Abul Mansur. (1995). A fractional cointegration approach to empirical tests of PPP: new evidence and methodological implications from an application to the Taiwan/US dollar relationship. Review of World Economics = Weltwirtschaftliches Archiv, 131 (4), pp. 673-694
Publisher
Springer Berlin Heidelberg