Testing Purchasing Power Parity Theory: A Case Study in Non-Falsificationism

D Hodge

Studies in Economics and Econometrics, 1999, vol. 23, issue 1, 21-39

Abstract: This paper examines empirical tests of purchasing power parity theory (PPP) from a methodological perspective. In particular the issue of whether economists have seriously attempted to falsify the theory is addressed. While the results of econometric tests have been largely negative, this has not led to the falsification of PPP or its rejection by economists. The main reason for this is that economists have in practice adopted a methodology resembling the older inexact method a priori, revived recently by Hausman. The intensive econometric work into PPP may thus be construed as the attempt to find satisfactory empirical models of the theory or testing for the limitations and range of application of the underlying theory, rather than seriously testing the theory with a view to falsification. The nature and extent of the progress made in this field is also questioned.

Date: 1999
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DOI: 10.1080/03796205.1999.12129134

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