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Gaps galore in the monetary approach to the purchasing power parity: a theoretical note

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  • Ganti Subrahmanyam
  • Kalluru Shiva Reddy

Abstract

Purchasing Power Parity (PPP) is one of the most tested theories of international economics. Even sophisticated statistical tests mostly threw up evidence against the PPP for many countries. Except for the run-of-the-mill criticisms, there has been no theoretical attempt made so far to explain the deviations from the PPP. This note is to show theoretically that besides the standard money supply growth rate differences, there are, at least, seven other factors that can cause differences in inflation rates that in turn cause the PPP deviations. The standard macro-money demand function alone provides us with the theoretical framework for our study.

Suggested Citation

  • Ganti Subrahmanyam & Kalluru Shiva Reddy, 2019. "Gaps galore in the monetary approach to the purchasing power parity: a theoretical note," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 12(3), pages 197-204, September.
    • Handle: RePEc:taf:macfem:v:12:y:2019:i:3:p:197-204
    DOI: 10.1080/17520843.2019.1620820
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