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Does Purchasing Power Parity Work?

  • Michael R. Darby

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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File URL: http://www.nber.org/papers/w0607.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0607.

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Date of creation: Dec 1980
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Publication status: published as Michael R. Darby, 1981. "Does purchasing power parity work?," Proceedings, Federal Reserve Bank of San Francisco, pages 136-173.
Handle: RePEc:nbr:nberwo:0607
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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