Purchasing power parity in the Colombian exchange rate
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Abstract
Objective: to determine the fulfillment of the purchasing power parity (PPP) theory in Colombia, the exchange rate with the US dollar using as a standard.
Methodology: to check if the PPP in Colombia is achieved, monthly and quarterly data was used, which ran from January 1959 to December 2015. To do this, the long-term behavior from the real exchange rate was modeled, contrasting the unit roots presence and structural changes. In addition, a bivariate cointegration model was used.
Results: it was found that, in the case of Colombia, the PPP theory was not fulfilled, since the peso and the dollar are not cointegrated. Therefore, according to the unitary root methodology, the PPP hypothesis in Colombia for the period 1959-2015 is not validated. Everything seems to indicate that the Colombian peso has little relation with the US dollar.
Conclusions: the use of general price indices, which include tradable goods between countries, multiple barriers to international trade, imperfect competition and social, economic, political and cultural differences between both countries are important aspects when explaining the unfulfillment of the PPP.
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Purchasing power parity, Real exchange rate, Unitary root, Cointegration
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