Multilateral Versus Bilateral Testing for Long Run Purchasing Power Parity: A Cointegration Analysis for the Greek Drachma

Problems faced by empirical studies of the purchasing power parity (PPP) hypothesis are: the choice between a multilateral and a bilateral approach, the choice of the appropriate price index and the problem of simultaneous determination of prices and exchange rates. In the present paper, we analyze the implications that these problems have, while testing for the PPP doctrine between Greece and its three major trading partners during the recent floating exchange rate period. Long-run PPP is tested as an exchange rate-pricecointegrating relationship by applying a multivariate maximum likelihood procedure, using two alternative price measures.