Purchasing power parity and cointegration: The Greek evidence from the 1920s

Abstract

This paper presents empirical evidence which supports the purchasing power parity (PPP) hypothesis for three bilateral exchange rates involving the Greek drachma during the 1920s, using the technique of cointegration of economic time series. The results are obtained for a period of high money supply growth and a high and variable rate of inflation which gave rise to large differentials in price movements between Greece and the other countries. The speed at which long-run PPP was reached following a shock was 50 per cent per month confirming the results of other studies of PPP over the 1920s, and explaining the supportive evidence for long-run PPP even though data over a short period were used. (JEL F31)