Feedback between US and UK Prices: a Frequency Domain Analysis

This paper decomposes the feedback between US and UK price levels by frequency over the period 1791 to 1990. By adapting Geweke's (1982) method of decomposing the feedback between time series to the case of I(1) time series generated by a bivariate error-correction model, we find that most of the feedback between the two time series occurs at very low frequencies. This result provides a reconciliation of the typical rejection of purchasing power parity (PPP) in short-run studies with the findings of paradoxically short half-lives for deviations from PPP often found in long-run studies.