1 Purchasing Power Parity: The Irish Experience Re-visited by

This paper looks at issues surrounding the testing of purchasing power parity using Irish data. Potential difficulties in placing the analysis in an I(1)/I(0) framework are highlighted. Recent tests for fractional integration and nonlinearity are discussed and used to in-vestigate the behaviour of the Irish exchange rate against the United Kingdom and Germany. Little evidence of fractionality is found but there is strong evidence of nonlinearity from a variety of tests. Im-portantly, when the nonlinearity is modelled using a random field re-gression, the data conform well to purchasing power parity theory, in contrast to the findings of previous Irish studies, whose results were very mixed