Gaps galore in the monetary approach to the purchasing power parity: a theoretical note

Ganti Subrahmanyam and Kalluru Shiva Reddy

Macroeconomics and Finance in Emerging Market Economies, 2019, vol. 12, issue 3, 197-204

Abstract: Purchasing Power Parity (PPP) is one of the most tested theories of international economics. Even sophisticated statistical tests mostly threw up evidence against the PPP for many countries. Except for the run-of-the-mill criticisms, there has been no theoretical attempt made so far to explain the deviations from the PPP. This note is to show theoretically that besides the standard money supply growth rate differences, there are, at least, seven other factors that can cause differences in inflation rates that in turn cause the PPP deviations. The standard macro-money demand function alone provides us with the theoretical framework for our study.

Date: 2019
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DOI: 10.1080/17520843.2019.1620820

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