Does Purchasing Power Parity Work?
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.
|Date of creation:||Dec 1980|
|Date of revision:|
|Publication status:||published as Michael R. Darby, 1981. "Does purchasing power parity work?," Proceedings, Federal Reserve Bank of San Francisco, pages 136-173.|
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