Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/18020 
Authors: 
Year of Publication: 
2008
Citation: 
[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [ISSN:] 1864-6042 [Volume:] 2 [Issue:] 2008-7 [Publisher:] Kiel Institute for the World Economy (IfW) [Place:] Kiel [Year:] 2008 [Pages:] 1-26
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
Abstract: 
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.
Subjects: 
Law of one price
errors-in-variables
latent dynamic factor
error correction
JEL: 
C33
F31
C22
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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