Purchasing power parity and frequency domain filtering

by Carnovale, Christina

Purchasing Power Parity (PPP) theory is one of the most endwing concepts in economics. The theory establishes a long-run relationship between prices and the nominal exchange rate. The important contribution of this papa stems h m the application of a new and original econometric rnethodology as well as the unusually long data series. In this paper, PPP is reexarnined using the Christiano and Fitzgerald filter, applied to over a century of data for 10 countries. The countries in question are Canada, Denmark, Finland, Italy, Norway, Portugal, Sweden, Switzerland and the United Kingdom, al1 tested against the United States. Using the above technique, strong evidence of PPP is uncovered while more traditional techniques continue to be unable to find support. The application of the Christiano and Fitzgerald filter provides a new and exciting direction for fiirther research on PPP. iii