Purchasing Power Parity in the Long Run : A Cointegration Approach Author : Yoonbai Kim Source : Journal of Money, Credit and Banking, Vol. 22, No. 4 (Nov., 1990), pp. 491-503 Published by : Ohio State University Press 國 際 金 融 授課教授 楊奕農 學　　生 古紫燕

Introduction Purchasing Power Parity is the exchange rate and the relative price level of two countries. Apply cointegration analysis to examine the long term exchange rate and price relationship between the USA and each of the following countries: Canada, France, Italy, Japan, UK.

Data and Methods Exchange rate Unit Root Test Cointegration Test (domestic / foreign) Wholesale Price Index ( WPI ) 1900-1987 Consumer Price Index ( CPI ) 1914-1987 Cointegration Test Unit Root Test

Results (2) (3) (4)

Results 5% 1%

Results 1% 5%

Results Reject the Random Walk

Conclusion The nominal exchange rate is cointegrated with the WPI-ratio and the CPI-ratio, except for the Canadian dollar. Finally, our approach dealing with exchange rate and price ratios on a bilateral basis is supported by the finding that each set of exchange rates or relative prices share no common trends.

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