Relative Purchasing Power Parity under Fixed and Flexible Exchange Rates

Elsworth D. Beach, Nancy H. Cottrell and Noel D. Uri ()
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Elsworth D. Beach: U.S. Department of Agriculture, Washington, DC, Postal: 1400 Independence Ave., S.W., Washington, DC 20250, http://www.usda.gov/wps/portal/usdahome
Nancy H. Cottrell: University of Nebraska-Lincoln, Postal: 1400 R Street, Lincoln, NE 68588, USA, http://www.unl.edu/
Noel D. Uri: Industry Analysis Division, Media Bureau, Federal Communications Commission, Postal: 445 12th Street SW Washington, DC 20554, USA ,, http://www.fcc.gov/mb/industry_analysis/

Economia Internazionale / International Economics, 1993, vol. 46, issue 1, 4-32

Abstract: This paper examines the doctrine of Relative Purchasing Power Parity during periods of fixed and flexible exchange rates. Using cointegration techniques and data for the Group of Seven countries, the results suggest that Purchasing Power Parity held only between the United States and the United Kingdom over the period 1957 QI to 1973 QII. Different results are obtained for the 1973 QIII to 1990 QIV period. Based on an error correction model, it is concluded that Purchasing Power Parity held between the United States and Canada, the United States and Franca, the United States and Italy, and the United States and the United Kingdom. Correction for the instability in the underlying static cointegrating regressions o» which these results are based, however, leads to a revision in this conclusion. In particular, contrary to the initial indications, it is demonstrated that Purchasing Power Parity did not hold over this period between the United States and the other Group of Seven countries.

Date: 1993
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