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Deviations From Purchasing Power Parity: The Australian Case

Author

Listed:
  • Adrian Blundell-Wignall

    (Reserve Bank of Australia)

  • Marilyn Thomas

    (Reserve Bank of Australia)

Abstract

The hypothesis that deviations from PPP follow a random process is tested against two alternatives that the real exchange rate reverts to a constant equilibrium level (long-run PPP); and that it reverts to an equilibrium level which is itself a function of shifts in commodity prices (long-run PPP doesn’t hold, but for reasons that are predictable). The random walk hypothesis cannot be rejected if commodity prices are ignored or if the nominal exchange rate is fixed. It is consistently rejected when commodity prices are included and the exchange rate is floating.

Suggested Citation

  • Adrian Blundell-Wignall & Marilyn Thomas, 1987. "Deviations From Purchasing Power Parity: The Australian Case," RBA Research Discussion Papers rdp8711, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp8711
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    File URL: https://www.rba.gov.au/publications/rdp/1987/8711.html
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    Cited by:

    1. Shakila Aruman & Mardi Dungey, 2001. "A Perspective on Modelling the Real Trade Weighted Index Since the Float," CEPR Discussion Papers 435, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    2. Maria Perez Jurado & Juan Luis Vega, 1994. "Paridad del poder de compra: un análisis empírico," Investigaciones Economicas, Fundación SEPI, vol. 18(3), pages 539-556, September.
    3. David W.R. Gruen & Jenny Wilkinson, 1991. "Australia’s Real Exchange Rate – Is it Explained by the Terms of Trade or by Real Interest Differentials?," RBA Research Discussion Papers rdp9108, Reserve Bank of Australia.
    4. Philip Lowe, 1992. "The Impact of Real and Nominal Shocks on Australian Real Exchange Rates," RBA Research Discussion Papers rdp9201, Reserve Bank of Australia.
    5. Jacqueline Dwyer & Philip Lowe, 1993. "Alternative Concepts of the Real Exchange Rate: A Reconciliation," RBA Research Discussion Papers rdp9309, Reserve Bank of Australia.
    6. Adrian Blundell-Wignall & Michele Bullock, 1992. "Changes in the Characteristics of the Australian Business Cycle: Some Lessons for Monetary Policy from the 1980s and Early 1990s," RBA Research Discussion Papers rdp9212, Reserve Bank of Australia.

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