Using a VECM to test exogeneity and forecastability in the PPP condition

The possibility is explored that purchasing power parity (PPP) can be useful in forecasting exchange rates and/or prices. The first step shows that the spot exchange rate is statistically exogenous in the PPP relationship. The next step investigates the forecastability of the variables in the PPP co...

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Bibliographic Details
Published in:Applied financial economics 1997, Vol.7 (1), p.87-95
Main Authors: Norrbin, Stefan C., Reffett, Kevin L., Ji, Yaohua
Format: Article
Language:English
Subjects:
Economic models
Exchange rates
Financial economics
Forecasting techniques
Forecasts
Foreign exchange rates
Prices
Purchasing power
Purchasing power parity
Regression analysis
Studies
U.S.A
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Summary:The possibility is explored that purchasing power parity (PPP) can be useful in forecasting exchange rates and/or prices. The first step shows that the spot exchange rate is statistically exogenous in the PPP relationship. The next step investigates the forecastability of the variables in the PPP condition. The results show that a VECM can beat a random walk only in the case of the US price level.
ISSN:0960-3107
1466-4305
DOI:10.1080/096031097333871