Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Collapse of Purchasing Power Parities during the 1970s

Contents:

Author Info

  • Jacob A. Frenkel
Registered author(s):

    Abstract

    This paper reviews and analyzes the empirical record of exchange rates and prices during the 1970's and the analysis is based on the experience of the Dollar/Pound, the Dollar/French Franc and the Dollar/DM exchange rates. Section 2 presents the evidence on PPP during the 1970's and contrasts it with the evidence from the 1920's -- a period during which the doctrine held up reasonably well. This analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks, and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy. The evidence regarding deviations from purchasing power parities is also relevant for determining whether there is a case for managed float. Section 3 attempts to explain what went wrong with the performance of the doctrine during the 1970's. It examines the hypothesis that the departures from PPP are a U.S. phenomenon, as well as the hypothesis that the departures are due to large changes in inter-sectoral relative price changes within the various economies. Given that the predictions of the simple versions of PPP do not hold up, section 4 proceeds in examining the question of whether national price levels have been independent of each other. Section 5 addresses the question of whether exchange rates and national price levels are comparable and whether in principle one should have expected them to be closely linked to each other. The main point that is being emphasized is that there is an important intrinsic difference between exchange rates and national price levels which stems from the basset market theory' of exchange rate determination. This theory implies that the exchange rate, like the prices of other assets, is much more sensitive to expectations concerning future events than national price levels and as a result, in periods which are dominated by news' which alter expectations, exchange rates are likely to be much more volatile than national price levels and departures from PPP are likely to be the rule rather than the exception. Finally, section 6 concludes the paper with some policy implications.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w0569.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0569.

    as in new window
    Length:
    Date of creation: Oct 1980
    Date of revision:
    Publication status: published as Frenkel, Jacob A. "Collapse of Purchasing Power Parities during the 1970s." European Economic Review, Vol. XVI, No. 1, (May 1981), pp. 145-165.
    Handle: RePEc:nbr:nberwo:0569

    Note: ITI EFG IFM
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, American Economic Association, vol. 70(2), pages 374-81, May.
    2. R. Dornbusch, 1979. "Monetary Policy Under Exchange Rate Flexibility," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 228, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Robert J. Gordon, 1975. "Recent Developments in the Theory of Inflation and Unemployment," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 199, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Lawrence H. Officer, 1982. "The Purchasing-Power-Parity Theory of Gerrard de Malynes," History of Political Economy, Duke University Press, vol. 14(2), pages 256-259, Summer.
    5. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 11(1), pages 9-57, January.
    6. Brunner, Karl & Meltzer, Allan H., 1976. "Institutional arrangements and the inflation problem," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 3(1), pages 1-13, January.
    7. Mussa, Michael, 1976. "Our recent experience with fixed and flexible exchange rates: A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 3(1), pages 123-141, January.
    8. Jacob A. Frenkel & Michael L. Mussa, 1980. "Efficiency of Foreign Exchange Markets and Measures of Turbulence," NBER Working Papers 0476, National Bureau of Economic Research, Inc.
    9. Brunner, Karl & Meltzer, Allan H., 1979. "Policies for employment, prices, and exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 11(1), pages 1-7, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Mark J. Holmes & Jesus Otero & Theodore Panagiotidis, 2011. "PPP in OECD countries: An analysis of real exchange rate stationarity, cross-sectional dependency and strucutral breaks," Discussion Paper Series 2011_17, Department of Economics, University of Macedonia, revised Nov 2011.
    2. Tracy Yue Wang & David Hirshleifer & Bing Han, 2010. "Investor Overconfidence and the Forward Discount Puzzle," 2010 Meeting Papers, Society for Economic Dynamics 1201, Society for Economic Dynamics.
    3. Macchiarelli, Corrado, 2014. "Bond market co-movements, expected inflation and the GBP-USD equilibrium real exchange rate," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 54(2), pages 242-256.
    4. Marcos José Dal Bianco, 2008. "Argentinean real exchange rate 1900-2006, test purchasing power parity theory," Estudios de Economia, University of Chile, Department of Economics, University of Chile, Department of Economics, vol. 35(1 Year 20), pages 33-64, June.
    5. Martins Bitans, 2004. "Pass-Through of Exchange Rates to Domestic Prices in East European Countries and the Role of Economic Enviroment," Working Papers, Latvijas Banka 2004/04, Latvijas Banka.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0569. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.