A Century of Purchasing-Power Parity

22 Pages Posted: 18 Nov 2000  

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: November 2000

Abstract

This paper investigates purchasing-power parity (PPP) since the late nineteenth century. I collected data for a group of twenty countries over one hundred years, a larger historical panel of annual data than has ever been studied before. The evidence for long-run PPP is favorable using recent multivariate and univariate tests of higher power. Residual variance analysis shows that episodes of floating exchange rates have generally been associated with larger deviations from PPP, as expected; this result is not attributable to significantly greater persistence (longer halflives) of deviations in such regimes, but is due to the larger shocks to the real-exchange rate process in such episodes. In the course of the twentieth century there was relatively little change in the capacity of international market integration to smooth out real exchange rate shocks. Instead, changes in the size of shocks depended on the political economy of monetary and exchange-rate regime choice under the constraints imposed by the trilemma.

Suggested Citation

Taylor, Alan M., A Century of Purchasing-Power Parity (November 2000). NBER Working Paper No. w8012. Available at SSRN: https://ssrn.com/abstract=250367

Alan M. Taylor (Contact Author)

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