Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from Five OECD Countries

This study explores a new modelling approach that bridges the gap between multilateral country-level data and the bilateral-model based, goods-market specific purchasing power parity (PPP) hypothesis. Under this approach, PPP is embedded in latent common factors, extractable from a large set of bilateral price disparities, and tested via an error-correction model where the factors act as error-correction leading indicators for exchange rate and inflation. Significant modelling results for five OECD countries using monthly data suggest that the extant finding of insignificant PPP using similar data should be due to errors-in-variables attenuation and that its correction lies in effective construction of latent variables.

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Year of publication:	2008
Authors:	Qin, Duo
Published in:	Economics: The Open-Access, Open-Assessment E-Journal. - Kiel : Kiel Institute for the World Economy (IfW), ISSN 1864-6042. - Vol. 2.2008, 2008-7, p. 1-26
Publisher:	Kiel : Kiel Institute for the World Economy (IfW)
Subject:	Kaufkraftparität \| Fehlerkorrekturmodell \| Dynamisches Modell \| Schätzung \| Kanada \| Frankreich \| Deutschland \| Japan \| Großbritannien \| Law of one price \| errors-in-variables \| latent dynamic factor \| error correction

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Type of publication:	Article
Type of publication (narrower categories):	Article
Language:	English
Other identifiers:	10.5018/economics-ejournal.ja.2008-7 [DOI] 560130384 [GVK] hdl:10419/18020 [Handle] RePEc:zbw:ifweej:7124 [RePEc]
Classification:	C33 - Models with Panel Data ; F31 - Foreign Exchange ; C22 - Time-Series Models
Source:	EconStor

Persistent link: https://www.econbiz.de/10010295305