Purchasing Power Parity and Real Exchange Rates

Purchasing power parity (PPP), the doctrine that prices of goods and services expressed in a common currency are equalized, is described. The evidence regarding PPP, obtained using long run statistical methods, long spans of data, or both, is evaluated. The failure of absolute PPP provides the basis for discussing the determinants of real exchange rate changes, both over the short and long run. Various theoretical models, and their relation to empirical evidence, is then recounted.


  • Series: La Follette School Working Paper No. 2018-010
  • Author: Menzie Chinn

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