Co-integration, Error Correction, and Purchasing Power Parity between Canada and the United States.

The concept of cointegration and the associated error-correction representation of a dynamic process (see R. F. Engle and C. W. G. Granger, 1987) is applied to the purchasing power parity relationship between Canada and the United States. The results are supportive of purchasing power parity as a long-run equilibrium relationship between the Canadian dollar/American dollar exchange rate. The purchasing power parity relationship is maintained, although with different dynamic mechanisms, during both fixed and flexible exchange rate regimes.