Testing PPP hypotheses between Japan and the six G7 countries

Yoshihiko Tsukuda, Tatsuyoshi Miyakoshi

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


The paper examines the purchasing power parity (PPP) theory of the foreign exchange rate of the yen against the currencies of the six G7 countries. We use the error-corrected five-dimensional vector autoregressive (VAR) model with structural changes in the trend function. The data cover the period of the post-Breton-Woods floating exchange rate system. The results reveal that the PPP relation alone determines the exchange rates for the USA, France, Germany, and Italy, while a linear combination of PPP and uncovered interest rate parity (UIP) relations determines that for Canada. In a model without trend breaks, the PPP relations hold only for Germany, which indicates that a correct specification of the sampling distribution of data is important. The one-step prediction based on the error correction model (ECM) outperforms the random walk model. The ECM is useful to predict the out-of-sample behaviors of the exchange rates.

Original languageEnglish
Pages (from-to)155-177
Number of pages23
JournalAsia-Pacific Financial Markets
Issue number2
Publication statusPublished - 2000
Externally publishedYes


  • Cointegration
  • Error correction model
  • One-step prediction
  • Purchasing power parity
  • Uncovered interest rate parity

ASJC Scopus subject areas

  • Finance


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