The Purchasing Power Parity Criterion for Stabilizing Exchange Rates

International Monetary Fund

No 1989/052, IMF Working Papers from International Monetary Fund

Abstract: The use of purchasing power parity as a basis of fixing exchange rates among industrial countries, as proposed by McKinnon, is discussed and contrasted with alternative interpretations of the PPP doctrine. Major policy implications of such a regime are emphasized. Furthermore, a new technique for estimating PPP exchange rates which makes use of price pressure exerted by exchange deviation is introduced. This method is capable of solving the “base-year” problem more satisfactorily than the traditional Cassel-Keynes methodology. Estimated yen/dollar and mark/dollar PPP exchange rates are close to estimates derived using other methods.

Keywords: WP; nominal exchange rate; floating exchange rate; base year; international monetary system; PPP exchange rate; PPP estimate; PPP doctrine; PPP criterion; dollar path; exchange rate target; dollar rate; Exchange rates; Purchasing power parity; Exchange rate arrangements; Floating exchange rates; Labor costs; Global (search for similar items in EconPapers)
Pages: 48
Date: 1989-01-01
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