PPP: a Disaggregated View
No 2004,07, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank
By disaggregating price indices, it becomes apparent that the real exchange rate consists of the real exchange rate for a single good and a weighted sum of relative prices between goods. When applying a battery of panel unit root tests to this sum and its components, it is found that both the sum and the relative prices are non-stationary. This implies that PPP is invalid even if the LOP holds for all goods. The findings contrast with the result from panel unit root tests that real exchange rates as a whole are stationary. Several suggestions for solving the conflict are discussed.
Keywords: purchasing power parity; real exchange rate; panel unit root tests (search for similar items in EconPapers)
JEL-codes: C33 F31 (search for similar items in EconPapers)
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Journal Article: PPP: a disaggregated view (2006)
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