A Reexamination of Purchasing Power Parity: A Multicountry and Multiperiod Study / Craig S. Hakkio.

Format:

Book

Author/Creator:

Hakkio, Craig S.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0865.

NBER working paper series no. w0865

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

A Reexamination of Purchasing Power Parity

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1982.

Summary:

This paper presents a systematic analysis of the purchasing power parity hypothesis (PPP). This hypothesis states that the exchange rate is equal to the ratio of the domestic price level to the foreign price level. It has recently been argued that PPP performs poorly in the 1970s. This paper examines several possible explanations for this poor performance . We examine PPF in the 1920s and the 1970s, using monthly and quarterly data, to see if the relationship has changed over time. We also examine PPP in a multi-exchange rate world, allowing a quite general error process so as to allow deviations from PPP to be autocorrelated and correlated across currencies. We are then able to examine the degree to which the world has become more interdependent. We also provide evidence that deviations from PPP may follow a random walk. Finally, the role of the U.S. dollar as base currency is examined. We find, in general, that PPP holds quite well as a long run proposition, but the deviations from PPP tend to persist.

Notes:

Print version record

March 1982.