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Does purchasing power parity work?

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  • Michael R. Darby

Abstract

The logarithm of the purchasing power ratio (PPR) is shown for seven countries and three alternative price indices to follow a stationary and invertible process in the first differences. This means that permanent shifts in the parity value accumulate over time. Therefore, as the prediction interval lengthens, the variance of the level of the PPR goes towards infinity while the variance of its average growth rate goes to zero. Since the variance of the permanent shifts is substantial: (1) Harmonized money growth cannot maintain constant exchange rates; reserve flows feedback is required. (2) Economic explanations of the permanent shifts are an important research topic.
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Suggested Citation

  • Michael R. Darby, 1981. "Does purchasing power parity work?," Proceedings, Federal Reserve Bank of San Francisco, issue 5, pages 136-173.
    • Handle: RePEc:fip:fedfpr:y:1981:p:136-173
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    Cited by:

    1. Andrew Phiri, 2017. "Nonlinear adjustment effects in the purchasing power parity," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 60(2), pages 14-38.
    2. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    3. Sundar, Cuddalore & Varela, Oscar & Naka, Atsuyuki, 1997. "Black market and official exchange rates, cointegration and purchasing power parity in developing Asian countries," Global Finance Journal, Elsevier, vol. 8(2), pages 221-238.
    4. Thomas L Bradley & Paul B Eberle, 2023. "Purchasing Power Parity In Russia And The Transitioning Economy 1990-1995," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 31, pages 85-111, June.
    5. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
    6. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.
    7. Mauro Ferreira, 2011. "Capturing asymmetry in real exchange rate with quantile autoregression," Applied Economics, Taylor & Francis Journals, vol. 43(3), pages 327-340.
    8. Ronald MacDonald, 1985. "Are deviations from purchasing power parity efficient? Some further answers," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 121(4), pages 638-645, December.
    9. Charles Pigott, 1981. "The influence of real factors on exchange rates," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 37-54.
    10. Kamrul Hassan & Ruhul Salim, 2011. "The linkage between relative population growth and purchasing power parity," International Journal of Development Issues, Emerald Group Publishing Limited, vol. 10(2), pages 154-169, July.
    11. Razzaque Bhatti & Imad Moosa, 1994. "A new approach to testing ex ante purchasing power parity," Applied Economics Letters, Taylor & Francis Journals, vol. 1(9), pages 148-151.
    12. repec:onb:oenbwp:y::i:28:b:1 is not listed on IDEAS
    13. John Pippenger, 1986. "Arbitrage and efficient markets interpretations of purchasing power parity: theory and evidence," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 31-47.
    14. Daniel Gros, 1989. "On the volatility of exchange rates: Tests of monetary and portfolio balance models of exchange rate determination," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 125(2), pages 273-295, June.
    15. Ntokozo Patrick Nzimande & Marcel Kohler, 2016. "On the Validity of Purchasing Power Parity: Evidence from Energy Exporting Sub-Saharan Africa Countries," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(3), pages 71-82, July-Sept.
    16. repec:kap:iaecre:v:14:y:2008:i:1:p:11-24 is not listed on IDEAS
    17. Mauro S. Ferreira, 2007. "Capturing asymmetry in real exchange rate with quantile autoregression," Textos para Discussão Cedeplar-UFMG td306, Cedeplar, Universidade Federal de Minas Gerais.
    18. Hakkio, Craig S., 1984. "A re-examination of purchasing power parity : A multi-country and multi-period study," Journal of International Economics, Elsevier, vol. 17(3-4), pages 265-277, November.
    19. Katja Funke & Isabell Koske, 2008. "Does the Law of One Price Hold within the EU? A Panel Analysis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 11-24, February.
    20. Cuddalore Sundar, 1994. "Impact of trade on purchasing power parity in black market and official exchange rates," Applied Economics Letters, Taylor & Francis Journals, vol. 1(5), pages 69-73.
    21. Christian Gouriéroux & Irina Peaucelle, 1992. "Séries codépendantes : application à l’hypothèse de parité du pouvoir d’achat," L'Actualité Economique, Société Canadienne de Science Economique, vol. 68(1), pages 283-304.

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