Causal and frequency analyses of purchasing power parity

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Abstract

A century after its development, the purchasing power parity theorem, which links exchange rates with prices, remains one of the most popular and influential economic theories. This study examines the relationship between exchange rates and prices from the perspectives of causality and spillovers. Using a panel of countries and advanced statistical methods, we estimate spillovers for all combinations of origins and destinations at different frequency bands, and show that their relationship is time-varying and multi-directional and has some validity at short and long time horizons. Furthermore, using exchange rate regimes, economic structures, currency crises, and trade openness, we identify economic conditions influencing the size and direction of spillovers.

Original languageEnglish
Article number101287
JournalJournal of International Financial Markets, Institutions and Money
Volume71
DOIs
Publication statusPublished - 2021 Mar

Keywords

  • Causality
  • Data frequency
  • High dimensional vector autoregression
  • Purchasing power parity
  • Spillover
  • Variance decomposition

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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