Long-Run purchasing Power Parity and Mean Reversion in Real Exchange Rates: A Further Assessment

The paper tests purchasing-power-parity as a long-run equilibrium condition, focusing on bilateral exchange rates between the dollar, the mark, and the yen. The sample consists of quarterly data ranging from 1955 to 1990. Differently from most previous work’s, a preliminary data investigation is performed, to seek for eventual deterministic trends which might seriously affect empirical findings from co integration analysis. Furthermore, since unit-root test have typically a low power against interesting stationary alternative, they are supplemented with a different methodology relying upon a variance-ratio approach. Overal1, long-run purchasing-power-parity is not supported by data considering mark/dollar and yen/dollar rates, while an opposite conclusion is drawn for the yen/mark exchange rate. This result appears to be robust to alternative research strategies.