Testing the Purchasing Power Parity Hypothesis: Re-examination by Additional Variables, Tests with Known Cointegrating Vectors, Monte Carlo Critical Values, and Fractional Cointegration
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This paper examines the Purchasing Power Parity (PPP) hypothesis of the yen-dollar exchange market by taking into account the following four points: accumulated current accounts as an additional variable, more powerful tests of Horvath and Watson(1995), more appropriate critical values through Monte Carlo experiments, and fractional cointegration. Results show that the PPP hypothesis is not necessarily rejected from the viewpoint of fractional cointegration, although analyses regarding the other three points cannot find any evidence of PPP.
PPP, cointegration, Monte Carlo experiments, fractional integration.