Purchasing Power Parity: A Canada/U.S. Exploration
Statistics Canada, Analytical Studies - Economic Analysis Series 11F0027MIE Working Paper No. 002
45 Pages Posted: 31 Oct 2002
Date Written: May 2002
Abstract
The paper examines the possible explanations for deviations from purchasing power parity (PPP) between Canada and the United States in the 1980s and 1990s. The Balassa-Samuelson (B-S) model is used as the basis for the empirical exercise. In the B-S model, where PPP is assumed to hold for tradable goods, the real exchange rate (corrected by the exchange rate between two countries) reflects the bilateral differences in the relative productivity of the tradable and nontradable sectors. We investigate both the productivity effect and the underlying PPP assumption for tradable goods.
Using a Canada/U.S. micro data set on four benchmark years (1985, 1990, 1993 and 1996), we apply univariate and nonparametric analysis and obtain several results. First, purchasing power parity is rejected for both tradables and nontradables during the time period examined. Within tradables, however, PPP is rejected for differentiated but not for homogeneous commodities. Second, price differences for tradables are decreasing in the 1990s, a period of increasing free trade between the two countries. Third, we find little support for a simple version of the Balassa-Samuelson productivity explanation of the diverging average prices (adjusted by exchange rate) between the two countries in the 1990s. We do find a relationship between these variables but it involves a lag structure that requires further study.
Keywords: purchasing power parity, Canada and United States
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
International Evidence on Tradables and Nontradables Inflation
-
By Matthew B. Canzoneri, Robert E. Cumby, ...
-
International Evidence on Tradables and Nontradable Inflation
-
Exchange Rates and Economic Fundamentals: A Methodological Comparison of Beers and Feers
By Peter B. Clark and Ronald Macdonald
-
Real Exchange Rates in the Developing Countries: Concepts and Measure- Ment
-
The EMS, the Emu, and the Transition to a Common Currency
By Kenneth Froot and Kenneth Rogoff
-
Real Exchange Rates and Productivity Growth in the United States and Japan
-
Asset Markets, Exchange Rates and the Balance of Payments
By Jacob A. Frenkel and Michael L. Mussa
-
By Enrique Alberola, Humberto Lopez, ...
-
Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence