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Purchasing Power Parity and Relative Price Variability: The Missing Link?

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  • Manzur, Meher

Abstract

The failure of strict purchasing power parity to hold in the 1970s can be explained by the preponderance of the real shocks which involve large changes in sectoral relative prices. Previous work has attempted to measure these effects by using proxies for the prices of traded and nontraded goods. In this study the author uses the Divisia price variance as a measure of changes in the structure of relative prices to reexamine the case for real shocks causing deviations from parity. Using data from 21 OECD countries, the results show that an increase in the variance of relative prices at home (in relation to that abroad) depreciates the currency. Copyright 1991 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

Suggested Citation

  • Manzur, Meher, 1991. "Purchasing Power Parity and Relative Price Variability: The Missing Link?," Australian Economic Papers, Wiley Blackwell, vol. 30(56), pages 128-147, June.
    • Handle: RePEc:bla:ausecp:v:30:y:1991:i:56:p:128-47
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    Cited by:

    1. 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.

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