Date of Award

Spring 2001

Document Type

Dissertation

Degree Name

Doctor of Business Administration (DBA)

Department

Economics and Finance

First Advisor

Dwight Anderson

Abstract

In this dissertation, I test the homogeneity and symmetry conditions of PPP by applying the Johansen multivariate cointegration methodology to quarterly data for six countries. I perform the tests in the framework of both a traditional version and an augmented version of PPP. The results of tests on the traditional version of PPP reveal that in all cases the theoretical PPP-vector [1, 1, −1] is not contained in the cointegrating space. This finding is consistent with that of existing literature and indicates the empirical failure of the homogeneity and symmetry conditions of PPP. However, when the traditional PPP is augmented with several non-price variables (real interest rate differential, relative growth rate of real GDP, relative current account balance as a percentage of GDP, and relative terms of trade), the theoretical PPP-vector [1, 1, −1] exists in all the instances except Germany. The fact that the theoretical PPP-vector exists in the augmented model but not in the traditional model indicates that the empirical failure of the PPP is caused by misspecification as a result of missing variables. The true relationship between exchange rates and prices, i.e., the homogeneity and symmetry conditions of PPP, is revealed once those ‘missing variables’ are added to the model. One potential reason for the failure to find the theoretical PPP-vector [1, 1, −1] in the case of Germany is the structural break caused by monetary reunification between Eastern and Western Germany in 1992.

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