Colombian Purchasing Power Parity Analysed Using a Framework of Multivariate Cointegration

This paper tests for purchasing power parity (PPP)between Colombia and its main trading partners using the Johansen framework of multivariate cointegration. The tests shows that PPP does not hold in the strong sense, but a clear purchasing power relationschip is, nevertheless, shown to exist. The model is, furthermore, shown to have significant forecasting power. It outperforms a random walk in out-of sample forecasting on the 12 and 24 month horizont but not on the 3 and 6-month horizon.