A FRACTIONAL COINTEGRATION APPROACH TO EMPIRICAL TESTS OF PPP - NEW EVIDENCE AND METHODOLOGICAL IMPLICATIONS FROM AN APPLICATION TO THE TAIWAN US DOLLAR RELATIONSHIP/

This paper applies a relatively new concept of fractional cointegratio n to shed some light on the validity of purchasing power parity as a l ong-run equilibrium condition, using the Taiwan/US dollar exchange rat e. Findings suggest that, while standard tests of cointegration fail t o support cointegration between nominal exchange rates, domestic and f oreign prices, the fractional cointegration analysis permits deviation s from equilibrium to follow a fractionally integrated process and hen ce captures a much wider class of parity or mean-reversion behaviour. The paper concludes by indicating areas in which fractional cointegrat ion will be a particularly appropriate technique to unearth previously unfounded temporal characteristics.