Purchasing power parity and the real exchange rate

Abstract

We assess the progress made by the profession in understanding realT he purchasing power parity (PPP) exchange rate is the exchange rate between two currencies that would equate the two relevant national price levels if expressed in a common currency at that rate, so that the purchasing power of a unit of one currency would be the same in both economies. This concept of PPP is often termed absolute PPP. Relative PPP is said to hold when the rate of depreciation of one currency relative to another matches the difference in aggregate price inflation between the two countries concerned. If the nominal exchange rate is defined simply as the price of one currency in terms of another, then the real exchange rate is the nominal exchange rate adjusted for relative national price level differences. When PPP holds, the real exchange rate is a constant, so that

Panel data tests of PPP: a critical overview

“…Therefore, it differs significantly from earlier surveys either of PPP studies (see, e.g., Froot and Rogoff, 1995, Rogoff, 1996, Sarno and Taylor, 2002, and Taylor, 2003, or of panel data econometrics (see Hall and Urga, 2000, Banerjee, 1999, McCoskey and Kao, 1999, and Phillips and Moon, 2001. Unlike earlier contributions of the former type, which tend to be rather comprehensive, but mention only briefly panel data studies on PPP (see, e.g.…”

Real exchange rates persistence in the West African monetary zone: a revisit of the PPP puzzle

“…We refer the interested reader to Rogoff (1996), Sarno and Taylor (2002), and Taylor and Taylor (2004) for excellent reviews of the PPP hypothesis. The earliest studies are mostly based on univariate regression techniques (see Isard, 1977;Kravis and Lipsey, 1978;Krugman, 1978;Hakkio, 1986;and Giovannini, 1988; for such examples).…”

Purchasing Power Parity In Mena Revisited: Empirical Evidence in the Presence of Endogenously Determined Break Points

“…The validity of the PPP has been extensively tested, especially for developed countries and focused on official exchange rates. In general, PPP is a valid long-run equilibrium condition at least in industrialized economies (see the survey of Froot and Rogoff, 1995;Sarno and Taylor, 2002;Sarno 2003). On the other hand, empirical evidence on the validity of long-run PPP for developing countries is rather mixed (see, for example, Telatar and Kazdaglı, 1998;Bahmani-Oskooee and Mirzai, 2000;Luintel, 2000;Basher and Mohsin, 2004).…”

“…If the nominal exchange rate is defined simply as the price of one currency in terms of another, then the real exchange rate is the nominal exchange rate adjusted for relative national price level differences (Sarno and Taylor, 2002).…”