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Is the relationship between prices and exchange rates homogeneous?

Hall, Stephen G.; Hondroyiannis, George; Kenjegaliev, Amangeldi; Swamy, P. A. V. B.; Tavlas, George S.


Stephen G. Hall

George Hondroyiannis

P. A. V. B. Swamy

George S. Tavlas


Empirical tests of purchasing power parity (PPP) are implicitly based on the conditions of symmetry and proportionality of the price coefficients. We investigate a separate condition, which we term homogeneity. Specifically, while there may be factors that drive a wedge between prices and exchange rates, when these factors are held constant we would expect a change in exchange rates to be associated with a proportional, or homogeneous, change in prices. To test for the existence of homogeneity in prices, we conduct two experiments. First, we apply a time-varying-coefficient procedure to nine euro-area countries as well as the euro area as a whole during the (monthly) sample period, 1999:M1 to 2011:M3. Second we apply the same procedure to the same group of countries, plus Canada, Japan and Mexico, over the longer period, 1957:M4 to 2011:M3. We find that averages of the price coefficients, corrected for specification biases, are uniformly homogeneous in the long run, providing strong support for PPP.


Hall, S. G., Hondroyiannis, G., Kenjegaliev, A., Swamy, P. A. V. B., & Tavlas, G. S. (2013). Is the relationship between prices and exchange rates homogeneous?. Journal of International Money and Finance, 37, 411-438.

Online Publication Date Jul 3, 2013
Publication Date Oct 1, 2013
Deposit Date Nov 13, 2014
Publicly Available Date Nov 23, 2017
Journal Journal of international money and finance
Print ISSN 0261-5606
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 37
Pages 411-438
Keywords Purchasing power parity; Symmetry; Proportionality; Homogeneity; Generalized cointegration; Time-varying coefficients
Public URL
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Additional Information Author's accepted manuscript of article published in: Journal of international money and finance, 2013, v.37


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