IS THERE TREND REVERSION IN PURCHASING POWER PARITY

This study presents some empirical evidence on purchasing power parity (PPP) using residualbased co-integration tests. Engle and Granger's (1987) tests and the ratio of the variance of higher-order differences to the variance of the first difference of the residuals of the cointegrating regression are used. Monthly data, over a span of 30 years, do not provide any empirical support to the theory. Conversely, in the annual data long-run equilibrium tendencies are evident. Since PPP has been widely used to provide an anchor for the equilibrium exchange rate, our results indicate that such an assumption is not completely inadequate. © 1991.