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Inter-Temporal Purchasing Power Parity

Author

Listed:
  • Janice Boucher Breuer
  • Vikram Kumar
  • Shyam Gouri 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 betweenthe 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.

Suggested Citation

  • Janice Boucher Breuer & Vikram Kumar & Shyam Gouri Suresh, 2014. "Inter-Temporal Purchasing Power Parity," Working Papers 14-10, Davidson College, Department of Economics.
    • Handle: RePEc:dav:wpaper:14-10
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    File URL: http://link.springer.com/article/10.1007/s11079-014-9338-4
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    JEL classification:

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

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