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Inter-Temporal Purchasing Power Parity

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  • Janice Breuer
  • Vikram Kumar
  • Shyam Suresh

Abstract

We adapt the Casselian version of purchasing power parity to a two-period framework. In this framework, we show that inter-temporal trade plays a role and can drive a wedge between the nominal exchange rate and relative prices. The size of trade flows, the real interest rate, and the constraint on trade balance over two periods establish the conditions under which Casselian and inter-temporal purchasing power parity hold. We test our model using consumer price indices and bilateral trade flows between the United States and the United Kingdom. We find evidence favorable to inter-temporal purchasing power parity. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Janice Breuer & Vikram Kumar & Shyam Suresh, 2015. "Inter-Temporal Purchasing Power Parity," Open Economies Review, Springer, vol. 26(5), pages 869-891, November.
    • Handle: RePEc:kap:openec:v:26:y:2015:i:5:p:869-891
    DOI: 10.1007/s11079-014-9338-4
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    More about this item

    Keywords

    Purchasing power parity; Real exchange rate; Inter-temporal trade; F31;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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