Purchasing Power Parity (PPP) theory has been controversial for some eighty years now. Today, sophisticated econometric techniques allow us not only to make more powerful tests of its validity than was ever possible in the past, but also to give out forecasts of nominal exchange rate dynamics. In this paper, we have essentially applied Johansen's multi-cointegration technique. After running unit root tests, we have checked PPP's validity for 12 couples of countries and computed cointegration vectors. For three of these couples, we have also estimated parcimonious VECMs and performed exogeneity tests. Impulse response analyses have completed our results. Although our investigations are based on only three exchange rates, the methodology seems to be promising for understanding nominal exchange rate dynamics.
AFTALION, F. and INDJEHAGOPIAN, J.P. (1996). Purchasing Power Parity Dynamics. ESSEC Business School.