DOI: 10.36347/sjebm.2015.v02i04.008

Pages: 369-378

Purchasing power parity theory discusses and compares the relationship of purchasing power of different currencies in different countries. It provides a better prediction method for the movement of long-term exchange rate,so it is inevitable and necessary to do a research on it. This paper focuses on the exchange rate between the US and Canada, in order to explore the validity of the purchasing power parity (PPP) model, which states that the equilibrium exchange rate should be consistent with the ratio of their relative price levels. It mainly uses OLS test, ADF test, Johansen test, VECM and impulse response analysis to verificate the model. Based on the data from 1995 to 2014 in this case, the conclusion indicates that PPP model is well fit. It is therefore concluded that the PPP hypothesis is upheld for Canada and US.