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Discrepancies between Purchasing Power Parities and Exchange Rates under the Law of One Price: A Puzzle (partly) Explained?

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  • Leon Podkaminer

    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

European Comparison Project data (years 1999-2008) are used for an estimation of cross-country systems (AIDS) of consumer demand functions defined over durable and non-durable tradable goods and non-tradable services. General exchange equilibrium models of inter-EU trade generate equalized relative prices of tradable goods. But domestic relative prices of services become more dispersed and can move the PPP/ER ratios away from unity. PPP/ER discrepancies may be sustained even when there are no impediments to free trade.

Suggested Citation

  • Leon Podkaminer, 2010. "Discrepancies between Purchasing Power Parities and Exchange Rates under the Law of One Price: A Puzzle (partly) Explained?," wiiw Working Papers 69, The Vienna Institute for International Economic Studies, wiiw.
    • Handle: RePEc:wii:wpaper:69
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    References listed on IDEAS

    as
    1. Balázs Égert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," Working Papers 138, Oesterreichische Nationalbank (Austrian Central Bank).
    2. N/A, 2007. "Real Convergence, Price Level Convergence and Inflation in Europe," Bruegel Working Papers 267, Bruegel.
    3. Joanna Wolszczak-Derlacz & Rembert De Blander, 2009. "Price convergence in the European Union and in the New Member States," Bank i Kredyt, Narodowy Bank Polski, vol. 40(2), pages 37-59.
    4. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
    5. repec:onb:oenbwp:y::i:138:b:1 is not listed on IDEAS
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    More about this item

    Keywords

    Purchasing Power Parity; exchange rate; PPP/ER discrepancy; Law of One Price; Balassa-Samuelson Effect; trade integration; computable general equilibrium; cross-country systems of demand functions; Almost Ideal Demand System; tradable goods; non-tradable goods;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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