Exchange Rate Volatility and Purchasing Power Parity: Does Euro Make Any Difference?
Keywords:
Purchasing power parity, Principal component analysis, Pooled inflation, Random walkAbstract
This paper provides a new test of the purchasing power parity (PPP) and its relevance for the Euro. Principal component analysis (PCA) is employed to construct a pooled measure of inflation for 12 Euro-currency countries. This measure is used to test the PPP for Euro against three major currencies, namely, those of the Japan, UK and USA. The test results are then used to measure the speed of adjustment of the deviations from parity using rolling and recursive regressions procedures. Finally, the forecasting accuracy of the PPP-based Euro exchange rates is compared with those given by the random walk model, and the synthetic Euro series provided by the European Central Bank. In general, the results are supportive of PPP.
Additional Files
Published
10-03-2010
How to Cite
Manzur, M., & Chan, F. (2010). Exchange Rate Volatility and Purchasing Power Parity: Does Euro Make Any Difference?. International Journal of Banking and Finance, 7(1), 99–118. Retrieved from https://e-journal.uum.edu.my/index.php/ijbf/article/view/8401
Issue
Section
Articles