Cointegration Testing of Multi-Country Purchasing Power Parity: The Case of Korea

Abstract

This paper investigates whether or not multi-country purchasing power parity holds and with what kind of variables the deviation from multi-country PPP has a stable long-term relationship through cointegration tests.

The result of the empirical analysis shows that considering structural changes the won-dollar exchange rate has a stable long-term relationship with interest rate differentials, current account, and long-term competitive won-dollar exchange rates.

After the structural change, the interest differentials and accumulated current account balance have had effects on the exchange rate in expected directions and the nominal exchange rate has moved appropriately to maintain competitiveness. Therefore, the won-dollar exchange rate after structural changes satisfies multicountry PPP in a broad sense.