On the Specification of the PPP Hypothesis
This paper presents a critique of the theoretical and empirical work on the PPP hypothesis since it was formalised by Cassel early this century. Two issues are addressed: the distinction between absolute and relative PPP, and between short-run and long-run PPP. It is argued that the distinction between absolute and relative PPP is redundant, fundamentally flawed and only emerged out of the misinterpretation of Cassel by his contemporaries and subsequent economists. It is also argued that the distinction between short-run and long-run PPP has not been dealt with properly in the literature, and has been confused with the distinction between absolute and relative PPP. It is concluded that the distinction between absolute and relative PPP should be abandoned and that economists should utilise some dynamic specifications that encompass short-run and long-run PPP.
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Volume (Year): 51 (1998)
Issue (Month): 3 ()
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