real exchange rates under the recent float unequivocal evidence of mean reversion standard multivariate tests of long run ppp may reject nonstationarity when a single real exchange rate series is stationary we apply a test where the null hypothesis is violated only when all series are stationary and reject nonstationarity for real dollar rates

sticky prices and deviations from the law of one price evidence from mexican micro price data abstract this paper uses a novel dataset of weekly sampled store level prices to study the impact of sticky prices on the volatility and persistence of intranational deviations from the law of one price lop the volatility of lop deviations is found to be increasing both on the distance separating two locations and on the degree of price stickiness sticky prices are also found to be systematically related to the persistence of lop deviations half lives of lop deviations are systematically larger for goods with stickier prices these observations are shown to accord well with the predictions of a dynamic general equilibrium model featuring real market segmentation and calvo pricing i also find evidence of remarkably fast convergence to the lop average half lives of lop deviations are in the order of 3 6 weeks and show that previously reported convergence estimates may be afflicted by a positive temporal aggregation bias

a portfolio approach to climate investments capm and endogenous risk is there a role for investments in climate change mitigation despite low expected return we use a model of intertemporal expected utility maximisation to analyse this question similar to the capital asset pricing model capm the rate of return depends on the correlation of risk between the return on investments in climate change mitigation and the market portfolio but in contrast to the classical capm we admit the fact that economic and environmental systems are jointly determined implying that environmental risk is endogenous therefore investments in climate change mitigation may reduce risk via self protection and self insurance if risk reduction is accounted for in cost benefit evaluations climate investments may be justified despite low expected return these aspects of climate investments are not however communicated via standard cost benefit analyses of climate policy optimal climate policy may therefore be more ambitious than previously considered

purchasing power parity in the long run a cointegration approach this paper utilizes cointegration analysis to examine purchasing power parity relationships over a long time horizon the results indicate that the exchange rate is cointegrated strongly with the wholesale price index ratio and somewhat weakly with the consumer price index ratio the cointegrating coefficient between the exchange rate and the price ratio is close to one when cointegration is confirmed the hypothesis that the real exchange rate follows a random walk is rejected in most cases finally a new test for common trends finds no such common trends in exchange rates or price ratios copyright 1990 by ohio state university press

re examination of the long run purchasing power parity further evidence from turkey in this article we re examine the empirical validity of the purchasing power parity ppp theory for the turkish economy for this purpose an empirical model is constructed using some contemporaneous estimation techniques such as multivariate co integration and vector error correction methodology our estimation results reveal that the ppp can strongly be supported as a long run stationary steady state relationship for the turkish economy

joint management of emission abatement and technological innovation for stock externalities we investigate how emission abatement and technological innovation provide different solutions to reduce pollutant emissions in the case of a stock externality emission abatement leads to a smooth and continuous adjustment of emissions conversely technological innovation has to be interpreted as an option on a less polluted environment and can justify the use of a pollution threshold above which it is optimal to start a research and development programme for a less polluting technology it is shown that technological innovation interferes with the traditional emission abatement approach the optimal abatement level is logically lowered once the less polluting technology is available nevertheless a temporary increase in emissions is optimal during the research and development period the usual pigouvian tax system proves to remain an efficient corrective instrument a numerical application to the greenhouse effect is provided

has the averch johnson effect been theoretically justified abstract in this paper we show that the averch johnson effect of overcapitalization by a regulated monopoly does not obtain when the firm operates in the decreasing cost range of output we develop a dynamic adjustment cost model of the firm and apply a recent result by brock and dechert for non concave hamiltonians to solve for the optimal investment policy for the firm with a phase diagram analysis we are able to make sharp comparisons between the regulated and unregulated cases in particular we show that investment by a regulated firm is lower than that of an unregulated firm even when the rate of return constraint is not binding

double co2 and beyond benefits costs and compensation abstract economic decisions over what action if any to take concerning the greenhouse effect tend to revolve around the social discount rate implicitly the debate concerns how to attribute intertemporal weights to welfare and implies a moral stance that is rarely given explicit recognition refocusing on the outcomes of current actions emphasises the role of compensation a conflict is apparent between the view that the current generation need be unconcerned over the loss or injury caused to future generations because they will benefit from advances in technology investments in both man made and natural capital and direct bequests and the requirement to avoid harming the innocent changes in units of welfare cannot be viewed as equivalent regardless of their direction in general doing harm is not cancelled out by doing good the result is a rejection of the potential compensation principle which underlies the current economic stance and a reconsideration of the acceptability of compensation altogether the concept of human rights and a non utilitarian perspective are used to show how cost benefit analysis denies the existence of inalienable rights and economics limits the moral considerability of harm

a flexible specification of adjustment costs in dynamic factor demand models this paper proposes a flexible form of adjustment cost function an empirical illustration shows that the flexible form can detect both convex and non convex adjustment costs furthermore the flex

scientific basis for the greenhouse effect the international community may reach agreement to limit carbon emissions as early as i 992 when brazil will host a negotiating convention on climate change europe and japan have already made commitments to place ceilings on future emissions at or below present rates because the cost of switching to alternative fuels could be high with profound implications for long term economic growth especially in developing countries policy action must be based on the view that the science of the greenhouse effect is compelling this essay considers the scientific logic and evidence for the effect from the viewpoint of an economist it draws heavily on the findings of the intergovernmental panel on climate change ipcc i will stress that both the science and the policy discussion so far including by ipcc have focused insufficiently on effects in the very long term on the order of 250 to 300 years

testing mean reversion in target zone exchange rates the aim of the paper is to assess to what extent european monetary system ems target zone exchange rates have been characterized by mean reverting behaviour to this purpose a new class of mean reversion tests is introduced with respect to standard approaches the proposed tests which are based on the sample excursion of the exchange rate within the band have a better ability to detect target zone mean reverting dynamics the empirical analysis of the exchange rates among the main ems currencies shows that the degree of mean reversion is much higher than what has been reported in the literature both before and after the target zone widening of 1993 finally the proposed tests have a wider range of applications since they originate a new approach to unit root testing

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

the economics of the greenhouse effect the recognition that economic activity is contributing to climatic change with attendant costs that may be of large magnitudes has set in motion a substantial research effort this paper seeks to review the contribution of economics to analysis of the greenhouse effect and to the policies and instruments suggested as means of mitigating its damage a brief overview of the causes and consequences of global warming is given and a number of energy economy forecasting models are examined as the costs of global warming depend upon the extent to which preventative and adaptive measures are undertaken the techniques available to evaluate these costs are surveyed we examine extant targets for greenhouse gas emissions reduction and explore the frameworks within which optimal policy targets can be designed the paper also considers the narrower question of minimized abatement costs and surveys the types of models used to estimate them the merits of alternative policy instruments are examined paying particular attention to the role that risk and uncertainty and the costs of monitoring and implementation of policy under conditions of imperfect information may play in the choice of instruments problems of international co operation in the development of abatement policy are examined and we consider the compensations across both nations and generations that are likely to be necessary conditions for effective action

real exchange rate behavior abstract using random simulations with artificial data with identical sample characteristics to the long sample exchange rate data employed by lothian and taylor lothian j r and taylor m p 1996 the recent float from the perspective of the past two centuries journal of political economy 104 488 509 we show that standard unit root tests have extremely low power over sample sizes corresponding to the recent float the probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans

smooth breaks and non linear mean reversion post bretton woods real exchange rates the recent literature on purchasing power parity ppp has emphasized the role of two phenomena that may lead to the rejection of the ppp hypothesis structural breaks and non linear adjustment induced by transaction costs these two hypotheses are analyzed separately in the literature we develop tests for unit roots that account jointly for structural breaks and non linear adjustment structural breaks are modeled by means of a fourier function that allows for infrequent smooth temporary mean changes and is hence compatible with long run ppp nonlinear adjustment is modeled by means of an estar model our tests present good finite sample properties the tests are applied to a set of 15 oecd countries rers and are able to reject the null of a unit root in 14 cases the breaks are usually associated with the great appreciation and later depreciation of the dollar in the 1980s and the estar adjustment appears to play an important role

greenhouse gas abatement under ambiguity observing that energy related climate change is an ambiguous prospect rather than a risky one this paper examines the consequences of different degrees of and attitudes towards ambiguity ambiguous choices differ from risky choices in that decision makers hold no firm probability distribution as to the consequences of their actions but recognize that preliminary probability estimates may be revised in the light of new information this ex ante recognition may lead to ambiguous choices and risky choices being evaluated differently the paper offers an explanation of why the evaluation of abatement programmes can differ among people who are likely to suffer similar climate impacts and might be thought to hold similar probability assessments

tests for symmetric and asymmetric nonlinear mean reversion in real exchange rates new tests based on smooth transition autoregressive models for mean reversion in time series of real exchange rates are proposed one test forces mean reversion to be symmetric about the integrated process central case while the other permits asymmetry the tests are applied to monthly series of seventeen real exchange rates against the u s dollar and fourteen against the deutsche mark they reveal stronger evidence against the unit root null hypothesis than does the usual dickey fuller test

rethinking the costs related to global warming a survey of the issues one approach to the economic analysis of global warming seeks to balance the costs of damage from or adaptation to it with the costs of mitigating it the costs of adaptation and damage have been estimated using techniques of environmental evaluation but are subject to a wide margin of uncertainty the costs of mitigation principally by reducing the emissions of co2 have been estimated using different kinds of economic models some of the results of which have suggested that very little abatement of carbon emissions is justified before the costs of abatement exceed the benefits of it in terms of foregone damage and adaptation costs the paper analyses the extent to which this conclusion is a function of the modelling assumptions and techniques used rather than likely practical outcomes with regard to the models treatment of unemployed resources revenue recycling prior distortions in the economy due to the tax system and possible dynamic effects from the introduction of a carbon energy tax it concludes that with different and arguably more appropriate treatment of the above issues especially when the secondary benefits of reducing co2 emissions are also taken into account it is not clear that even substantial reductions in the use of fossil fuels will incur net costs especially if there is the prospect of even moderate costs from global warming

real and nominal exchange rates in the long run an empirical investigation abstract this paper reports on econometric tests of the hypothesis that purchasing power parity holds as a long run relationship using data on eight industrialized countries during the flexible exchange rate period the empirical work proceeds by i testing whether nominal exchange rates and relative price levels are co integrated and ii conducting impulse response analysis of long run exchange rate and relative price level changes to explain the data keynesian models suggest that shocks during the estimation period were due principally to exogenous shifts in aggregate demand while equilibrium models suggest that monetary factors have been relatively more important

the impact of carbon taxation on the uk economy abstract the paper explores the likely macroeconomic impact of imposing a carbon tax at levels sufficient to reduce co 2 emissions significantly many studies have indicated the probablity of such a tax entailing substantial economic costs however such studies have not tended to take into account the possible positive effects of using carbon tax revenues to reduce distortionary taxes elsewhere in the economy or to offset competitiveness effects or of the possibility that a carbon tax will stimulate innovation and efficiency in the energy sector with positive economic results the paper concludes that when these factors are given due weight imposing a carbon tax is more likely to entail economic benefit than cost

competitiveness and exemptions from environmental taxes in europe a number of european countries have introduced a variety of environmental taxes a common characteristic of their implementation is the inclusion of exemptions and tax relief in particular for some sectors of manufacturing industry this paper analyses the pattern and motivation of exemptions as they have developed in western european countries making clear the difference between the nominal and effective tax rates once the exemptions have been taken into account the principal motivation for exemptions relates to concern about competitiveness while particular environmentally intensive sectors may have some grounds for concern even these might be able to achieve cost effective environmental improvements such that their competitive position is not over disadvantaged while for an economy structured like the uk s an environmental tax plus rebate scheme sometimes called an ecological tax reform would be likely to yield benefits in terms of competitiveness the exemptions usually run counter to the environmental economic logic of using environmental taxes to internalise social costs and give economic signals that are based on the full costs of production and they are likely to increase the costs of achieving a given level of emission reduction with little justification for them also on the grounds of competitiveness it would therefore be undesirable on both economic and environmental grounds for them to remain a feature of the implementation of environmental taxes in the future

dynamic behavior of the firm with adjustment costs under regulatory constraint abstract this paper investigates the optimal investment behavior of the regulated profit maximizing firm in a dynamic context the modern adjustment cost approach to investment is incorporated into the theory of a regulated firm which has typically been discussed in a static framework this paper thus generalizes the well known averch johnson thesis which is proved in the static context the paper investigates both the finite and infinite horizon cases

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

real exchange rate assessment in the gcc countries a trade elasticities approach this article adopts new panel econometric methods to assess real exchange rate alignment with economic fundamentals in the countries of the gulf cooperation council gcc using a theoretical approach popularized by paul krugman in the late 1980s results from panel econometric applications of the krugman model yield low levels of real exchange rate undervaluation in the gcc countries although indicating persistence of undervaluation albeit statistically low into the medium term they also show that the recent real exchange rate undervaluation could be characterized as due to short run frictions and adjustment costs associated with continued depreciation of the us dollar to which gcc countries currencies are pegged further failure to find supporting evidence for the marshall lerner condition underscores the propriety of using fiscal policy rather than exchange rate policy to address recent inflationary pressures and help resolve lingering global financial imbalances

a dns curve in a two state capital accumulation model a numerical analysis abstract in this paper we study a capital accumulation model in an optimal control theoretic framework where the capital stock and the investment rate are modelled as state variables and the change in the investment rate as control adjustment costs are introduced for investment rate and its change moreover we model network externalities by a convex segment in the revenue function which implies the existence of two long run optimal steady states one with a low level and the other with a high level capital stock it depends on the initial capital endowment and initial investment rate to which steady state it is optimal to converge we numerically compute a curve in the state plane for which it holds that when starting from a point on this curve the decision maker is indifferent between going to either one of these steady states and identify this curve as the dns curve the negative slope of the dns curve indicates that there is a trade off between the initial capital endowment and initial investment rate

on the nonexistence of market equilibria in exhaustible resource markets with decreasing costs this paper examines the existence of competitive equilibria in markets for exhaustible resources where there are initial economies of scale in either the extraction of the resource or the utilization of the resource as an input in production in such instances which are fairly common we find that the classic hotelling rule for competitive extraction does not apply since competitive price equilibria generally do not exist this is in marked contrast to static markets where the usual textbook example of firms with u shaped average cost curves is not inconsistent with the existence of competitive equilibria furthermore oligopolistic market equilibria in which resource firms act as nash producers may also fail to exist when there are returns to scale in production

optimal greenhouse gas emissions under various assessments of climate change ambiguity the probabilities associated with global warming damage are likely to be continuously revised in the light of new information such revisions of probability are the defining characteristic of ambiguity as opposed to risk this paper examines how climate change ambiguity may affect optimal greenhouse gas emission strategies via the decision maker s attitude towards anticipated changes of damage probabilities two conceptualizations of ambiguity are distinguished according to the emphasis placed on the ambiguity of priors or on the ambiguity of news respectively it is shown that the way in which ambiguity is viewed and the attitude taken towards it have a substantial influence on the optimal emission trajectory

can leviathan governments mitigate the tragedy of the commons this paper explores the conjecture whether the leviathan motive of politicians to tax for the purpose of raising revenues rather than for benevolent pigovian motives helps to overcome the inefficiency of international pollution spillovers such as in the cases of acid rain and global warming it turns out that this conjecture is true in a static context that captures flow externalities e g acid rain as long as environmental damages are not too high in contrast leviathan motives aggravate the already existing inefficiency in the case of stock externalities e g global warming despite probably high taxes at the beginning

leviathan governments and carbon taxes costs and potential benefits abstract this paper addresses positive aspects of the global warming debate that so far has been concerned by and large with normative issues the paper considers a consumers government that appreciates tax revenues as such leviathan in addition to conventional measures of welfare i e carbon taxes serve the dual purpose of correcting for externalities here global warming or more generally a stock externality from energy use and of raising revenues this government faces either a competitive or a perfectly cartelized supply the major findings are 1 i consumers may benefit from a leviathan government that appropriates some of the monopoly rent by deterring preemption to some extent 2 ii the leviathan motive raises initial taxes and thereby lowers initial emissions but increases the long run stock externality in a play with linear strategies 3 iii there exists a continuum of equilibria in nonlinear markov strategies which are however pareto inefficient compared with the linear strategies 4 iv but in case of a binding resource constraint nonlinear strategies are the only feasible ones

optimal dynamic investment policies under concave convex adjustment costs the paper considers a dynamic investment model of a monopolistic firm facing adjustment costs that are concave convex in the rate of gross investment the firm wishes to maximize the discounted stream of dividends over a finite planning horizon plus the terminal value of the stock of equity the problem of finding an optimal investment path is solved by combining results from a nonstandard model with concave adjustment costs with results from the standard model with convex adjustment costs the results are presented in phase diagrams and are economically interpreted the solution involves the use of a chattering control and we discuss various approaches to avoid the occurrence of such a control policy

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

accounting for global warming risks resource management under event uncertainty abstract optimal management of atmospheric pollution is discussed with a special emphasis on the uncertainty concerning the occurrence of undesirable events associated with the greenhouse effect the uncertainty considered here stems from our ignorance of the exact pollution level required to trigger the event rather than from the genuinely stochastic nature of the processes involved taking atmospheric pollution level as the state variable it is found that uncertainty implies the existence of an equilibrium interval within which the emission rate of the greenhouse gases should be kept equal to the natural removal rate of these gases processes initiated outside the equilibrium interval must converge monotonically to its nearest endpoint the determination of the interval requires no knowledge of the optimal policy in contrast ignoring event occurrence risk implies a single equilibrium level attracting the optimal process from any initial level

non convexities in continuous time investment theory that non convex preferences or technologies cause problems for economic theory is well known in recent years there have been numerous contributions to the nonconvexity problem in the context of models with a finite dimensional commodity space in the capital theory context non convexities have received explicit treatment in a few papers in two distinguishable ways the problem is cast either in a discrete time framework aoki 1971 rothschild 1971 or in a continuous time framework in which there are implicitly unbounded economies of scale in investment the latter formulation leads to jumps in the state variable or lumpy investment the standard problem treated is one of decreasing costs in the installation of new capacity contributions include chenery 1952 dixit mirrlees and stern 1975 hartwick 1976 manne 1967 srinivasan 1967 starrett 1978 and weitzman 1970 these types of analysis unfortunately ignore some of the most interesting problems associated with non convexities in investment theory in a discrete time framework the important distinction between stocks and flows is blurred while the capacity installation problem by admitting unbounded scale economies excludes the smoothing of state variables that follows by allowing for eventually increasing costs of adjustment in this paper we undertake a systematic examination of non convexities or sometimes non concavities in the context of a classic problem in continuous time investment theory the optimal accumulation of capital by a firm maximizing its present value over an infinite horizon while the results obtained are specific to this particular model we feel that they can be qualitatively extended to any capital theory problem which can be cast in a continuous time optimal control theory framework there are various sorts of non2 convexities which can arise in these problems first there can be either stock or flow non convexities that is non convexities which are introduced into the net benefit function the measure of the flow of benefits at each moment through changes in the capital stock state variable on the one hand or changes in the flow of investment control variable on the other if the benefit and transition functions are not concave in both these variables then necessary conditions are no longer sufficient for optimality and conventional marginal analysis fails non convexities can also be introduced into the value functional which has a stock dimension in order to examine these different sorts of non convexity problems we shall now present the basic economic problem a firm is faced with the problem of maximizing the present value of discounted cash flow over an infinite horizon hence it chooses an investment programme i t to maximize 00

dynamic capital structure choice and investment timing abstract the paper considers the problem of an investor that has the option to acquire a firm initially this firm is run as to maximize shareholder value where the shareholders are risk averse to do so it has to decide each time on investment and dividend levels the firm s capital stock can be financed by equity and debt where less solvable firms pay a higher interest rate on debt revenue is stochastic we find that the firm is run such that capital stock and dividends develop in a fixed proportion to the equity in particular it turns out that more dividends are paid if the economic environment is more uncertain we also derive that the relationship between the levels of risk aversion of the current shareholders and the potential investor is a significant determinant in establishing whether the firm is a profitable takeover target for the investor

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

public choice and the epa empirical evidence on carbon emissions violations this study provides evidence of public choice determinants of the penalties assessed by the environmental protection agency for carbon emissions violations following the work of stigler 1971 peltzman 1976 tollison 1982 and tullock 1989 this study points out that powerful business interest groups are able to use their political influence to shape epa environmental policy for urban areas the statistical estimates presented here suggest that business groups have limited power through lobbying activity in affecting the probability of the occurrence of an epa citation for carbon emissions violations while they may have considerable power in influencing thedegree of an epa citation for carbon emissions standards once a citation occurs

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

searching for stationarity purchasing power parity under the current float abstract using panel data methods we investigate long run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float the evidence against the unit root hypothesis is stronger for larger than for smaller panels for monthly than for quarterly data and when the german mark rather than the united states dollar is used as the base currency while we find that accounting for serial correlation considerably weakens the evidence against the unit root null the results as a whole are consistent with long run purchasing power parity

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound

the overvaluation of purchasing power parity abstract recent panel studies of purchasing power parity have reported strong evidence of mean reversion in real exchange rates however these studies fail to control for cross sectional dependence in the data this failure has dramatic consequences raising the significance level of tests with a nominal size of 5 percent to as much as 50 percent it is shown in this paper that controlling for cross sectional dependence no evidence against the random walk null can be found in panels of up to 64 real exchange rates this finding cannot be attributed to low power as there is ample power in panels of this size to reject the unit root null