Purchasing power parity as a long-term memory process

Abstract

Purpose – The purpose of this paper is to focus on whether the deviations from the cointegrating relationship possess long memory and the fractional cointegration analyses may capture a wider range of mean-reversion behaviour than standard cointegration analyses. Design/methodology/approach – This paper uses a fractional cointegration technique to test the purchasing power parity (PPP). Findings – The authors found that PPP held, but very weakly, in the long run between the Argentine, Brazil, Chile, Colombia, Indonesia, Korea, Mexico, Thailand and Venezuela and US exchange rate during our floating exchange rate period but that the deviations from it did not follow a stationary process. Nevertheless, it is also found that the deviations from PPP exists and can be characterized by a fractionally integrated process in nine out of 13 countries studied. Originality/value – The findings are consistent with the consensus of the empirical literature, reviewed earlier in this paper, on PPP between Argentine, Brazil, Chile, Colombia, Indonesia, Korea, Mexico, Thailand and Venezuela and the USA.