Long-Run Purchasing Power Parity and Structural Change: The Official and Parallel Foreign Exchange Markets For Dollars In Greece

Abstract

This paper examines the Purchasing Power Parity theory from a long-run perspective in the presence of a parallel or 'black' market for US dollars in Greece using monthly data for the recent float. Johansen's FIML multivariate cointegration techniques is applied. Recent development associated with this procedure are considered. First, a formal test developed by Paruolo (1996) for the presence of I(2) and I(1) components in a ultivariate context is applied along with the estimation of the roots of the companion matrix for the correct determination of the cointegration rank. Second, given that two significant cointegration vectors were found, structural restrictions identifying the long-run relations of interest are specified as proposed by Johansen and Juselius (1994) and Johansen (1995b). Thus, the joint structure of PPP and long-run informational market efficiency could not be rejected. Furthermore, estimation of the error correction terms shows that the black market rate adjusts to eliminate any deviation from long-run PPP. Finally, stability tests proposed by Hansen and Johansen (1993) are applied and it is shown that the dimension of the cointegration space is simple dependent while the estimated coefficients do not exhibit instability in recursive estimations. [F31 F33]