Does Loop Hold in a European Time Series Context?
Posted: 31 May 2009
Date Written: Nov 12, 2005
This paper provides an empirical analysis of the decomposition of Denmark Krone real exchange rates into the relative price of traded goods and the relative price ratio of non-traded and traded goods in a selective European time-series context to test the prediction that deviations from the law of one price in tradable goods dominates real exchange rate variability in the short run only. The Engle-Granger and Johansen’s method of co-integration is used to test this theory along with a half-life analysis to see the degree of persistence of traded goods. These tests suggest that law of one price does not hold.
Keywords: real exchange rates, Balassa-Samuelson, Engle-Granger, Johansens, (time series) co-integration
JEL Classification: C32, F3, F31, L12, L13, L81, N, P22
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