A co-integration based analysis of Irish purchasing power parity relationships using the Johansen procedure

Abstract

Empirical work has found little evidence for purchasing power parity, specified as a long-run co-integrating relationship between Ireland and trading partners. Using Irish/UK and Irish/German data, we find evidence for such co-integration if and only if the system is augmented by short interest rates. We use the Johansen procedure for estimation and inference on the augmented co-integrating system.