PPP: A Disaggregated View

Posted: 7 Mar 2012

Multiple version iconThere are 2 versions of this paper

Date Written: 2004

Abstract

By disaggregating price indices, it becomes apparent that the real exchange rate consists of the real exchange rate for a single good and a weighted sum of relative prices between goods. When applying a battery of panel unit root tests to this sum and its components, it is found that both the sum and the relative prices are non-stationary. This implies that PPP is invalid even if the LOP holds for all goods. The findings contrast with the result from panel unit root tests that real exchange rates as a whole are stationary. Several suggestions for solving the conflict are discussed.

Keywords: purchasing power parity, real exchange rate, panel unit root tests

JEL Classification: F31, C33

Suggested Citation

Fischer, Christoph A., PPP: A Disaggregated View (2004). Applied Financial Economics, Vol. 16, No. 1-2, 2006, Available at SSRN: https://ssrn.com/abstract=2017492

Christoph A. Fischer (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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