Co-integration, error correction, and purchasing power parity between Canada and the United States.

The concept of co-integration and the associated error-correction representation of a dynamic process (see Engle and Granger 1987) is applied to the purchasing power parity relationship between Canada and the United States. The results are supportive of purchasing power parity (PPP) as a long-run equilibrium relationship between Canadian prices, American prices, and the Canadian dollar / American dollar exchange rate. The PPP relationship is maintained, although with different dynamic mechanisms, during both fixed and flexible exchange rate regimes. [ABSTRACT FROM AUTHOR]