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Title:PPP: a Disaggregated View PDF Logo
Authors:Fischer, Christoph
Issue Date:2004
Series/Report no.:Discussion paper Series 1 / Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank 2004,07
Abstract: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.
Subjects:purchasing power parity
real exchange rate
panel unit root tests
JEL:C33
F31
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank

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