Re-evaluating whether absolute or relative purchasing power parity is being tested when using price indices

Chris Stewart

No 2023-1, Economics Discussion Papers from School of Economics, Kingston University London

Abstract: A growing body of research suggests that the literature applying unit root, stationarity and cointegration tests of long run purchasing power parity (PPP) and the law of one price (LOP) with price index data test relative PPP/LOP and not absolute PPP/LOP. We argue that such tests cannot determine when long run relative PPP/LOP is rejected and therefore are not tests of relative PPP/LOP. These are not tests of strong absolute PPP/LOP either. We contend that they are tests of weaker forms of absolute PPP/LOP and that determining which form of absolute PPP/LOP is useful in terms of, for example, establishing the form of long run flexible-price monetary exchange rate model that it implies.

Keywords: absolute purchasing power parity; relative purchasing power parity; the law of one price; price indices; unit root tests; cointegration tests; flexible-price monetary exchange rate models. (search for similar items in EconPapers)
JEL-codes: C32 C43 F31 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2023-04-28
New Economics Papers: this item is included in nep-des, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://kunet.kingston.ac.uk/~ku33681/RePEc/kin/papers/2023_001.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:kngedp:2023_001

Access Statistics for this paper

More papers in Economics Discussion Papers from School of Economics, Kingston University London Kingston University London, School of Economics, Penrhyn Road, Kingston upon Thames, Surrey, KT1 2EE, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Andrea Ingianni ().