Colombian Purchasing Power Parity Analysed Using a Framework of Multivariate Cointegration
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
This paper tests for purchasing power parity (PPP) between Colombia and its main trading partners using the Johansen framework of multivariate cointegration. The tests shows that PPP does not hold in the strong sense, but a clear purchasing power relationship is, nevertheless, show to exist. The model is, furthermore, show to have significant forecasting power. It outperforms a random walk in out-of-sample forecasting on the 12 and 24-month horizon but not on the 3 and 6-month horizon.
