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The triangular purchasing power parity hypothesis: A comment

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  • Alan King

Abstract

The recently proposed triangular purchasing power parity (PPP) hypothesis posits that, in a world dominated by the United States, China and Euroland, the exchange rate between the US dollar and the euro will be a function of the Euroland price level relative to China’s price level. Contrary to conventional PPP, the US price level plays no role. We show that the theory underlying triangular PPP is flawed and that it is no more than a simple transformation of the conventional PPP relationship. Moreover, some of the empirical evidence presented in support of the triangular PPP actually refutes one of its central ideas.

Suggested Citation

  • Alan King, 2021. "The triangular purchasing power parity hypothesis: A comment," The World Economy, Wiley Blackwell, vol. 44(3), pages 837-848, March.
    • Handle: RePEc:bla:worlde:v:44:y:2021:i:3:p:837-848
    DOI: 10.1111/twec.13050
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    References listed on IDEAS

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    1. Paul Cashin & C. John McDermott, 2006. "Parity Reversion in Real Exchange Rates: Fast, Slow, or Not at All?," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 1-5.
    2. Wang, P.J., 2013. "A driver currency hypothesis," Economics Letters, Elsevier, vol. 118(1), pages 60-62.
    3. Peijie Wang & Zhiyuan Liu, 2018. "A triangular purchasing power parity hypothesis," The World Economy, Wiley Blackwell, vol. 41(11), pages 3071-3097, November.
    4. Sarno, Lucio & Valente, Giorgio, 2006. "Deviations from purchasing power parity under different exchange rate regimes: Do they revert and, if so, how?," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3147-3169, November.
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    Cited by:

    1. Peijie Wang & Zhiyuan Liu, 2021. "A triangular purchasing power parity hypothesis: A rejoinder," The World Economy, Wiley Blackwell, vol. 44(3), pages 849-854, March.

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