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| Volume 7, No. 3,
December
2008 |
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A Cointegration Analysis of
Purchasing Power Parity and Country Risk |
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| Su-Yin Cheng |
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| Department of Finance, National Chung Cheng University, Taiwan |
| Jong-Shin Wei |
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Department of International Business, Wenzao Ursuline College of
Languages, Taiwan |
| Han Hou |
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| Department of Finance, National Chung Cheng University, Taiwan |
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| Abstract |
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This paper
examines purchasing power parity (PPP) for 61 countries using the
panel cointegration method developed by Westerlund (2007). After
controlling for cross-sectional dependence, the results show that
weak PPP is stronger for Latin American countries and for countries
with moderate country risk, defined in terms of political, economic,
and financial components, with direct or indirect implications for
the validity of PPP. Compared with a single country characteristic
that might affect PPP as suggested in the literature, country risk
captures more information for explaining the validity of the PPP
hypothesis. |
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| Key
words:
purchasing power parity; country risk; panel cointegration;
cross-sectional dependence |
| JEL
classification:
C23; F31; O57 |
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