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The Alternative to the Existing System of the Concepts about Purchasing Power Parity Deviations . Derived from the Estonian Experience

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  • Jaanus Raim

    () (Department of Economics at Tallinn University of Technology)

Abstract

The huge price differences between the former Soviet Union (FSU) and remaining world emerged at the beginning of 1990s. This phenomenon of hundredfold relative purchasing power of foreign currencies in the republics of FSU is not systematically explained by the traditional system of the Purchasing Power Parity (PPP) deviations¥ causes ñ by monetary, real demand side and real supply side shocks. In this context, the paper examines the traditional causes of price differences and derives the improved system of the PPP deviations¥ causes. We show that both the basic causes of PPP deviations are determined by potential investors¥ imagination about the usefulness of the countries¥ assets.

Suggested Citation

  • Jaanus Raim, 2004. "The Alternative to the Existing System of the Concepts about Purchasing Power Parity Deviations . Derived from the Estonian Experience," Working Papers 115, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  • Handle: RePEc:ttu:wpaper:115
    Note: Many thanks to the organisations and institutions which supplied data for this study in the context of bright transitional moment. Support from the Estonian Science Foundation (Project 5185) is greatly acknowledged by the author.
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    More about this item

    Keywords

    price convergence; FSU; PPP; PPP deviations; cheapness; capital-information mismatch; Balassa-Samuelson effect; cost-recovery hypothesis; subjective business climate;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F2 - International Economics - - International Factor Movements and International Business

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