Research Paper No. 531

RE-EXAMINING THE EVIDENCE FOR LONG-RUN PURCHASING POWER PARITY

by

Nilss Olekalns and Nigel Wilkins

August 1996

Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia

ABSTRACT

Corbae and Ouliaris (1991) examined Australia's long-run real exchange rate and concluded that because the data follow a random walk, purchasing power parity does not hold as a long-run equilibrium relation. We re-examine their data by calculating non-parametric measures of persistence and estimating fractionally integrated ARMA models. We find that shocks to the real exchange rate have a finite life. This result is consistent with long-run purchasing power parity.
 
 

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