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PPP: a Disaggregated View

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  • Fischer, Christoph

Abstract

By disaggregating price indices, it becomes apparent that the real exchange rate consists of the real exchange rate for a single good and a weighted sum of relative prices between goods. When applying a battery of panel unit root tests to this sum and its components, it is found that both the sum and the relative prices are non-stationary. This implies that PPP is invalid even if the LOP holds for all goods. The findings contrast with the result from panel unit root tests that real exchange rates as a whole are stationary. Several suggestions for solving the conflict are discussed.

Suggested Citation

  • Fischer, Christoph, 2004. "PPP: a Disaggregated View," Discussion Paper Series 1: Economic Studies 2004,07, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:1820
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    References listed on IDEAS

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    Cited by:

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    2. Christoph Fischer & Daniel Porath, 2010. "A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications," Empirical Economics, Springer, vol. 39(3), pages 767-792, December.

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    More about this item

    Keywords

    purchasing power parity; real exchange rate; panel unit root tests;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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