NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Perspectives on PPP and Long-Run Real Exchange Rates

Kenneth A. Froot, Kenneth Rogoff

NBER Working Paper No. 4952 (Also Reprint No. r2049)
Issued in April 1996
NBER Program(s):   ITI   IFM

This paper reviews the large and growing literature which tests PPP and other models of the long-run real exchange rate. We distinguish three different stages of PPP testing and focus on what has been learned from each. The most important overall lesson has been that the real exchange rate appears stationary over sufficiently long horizons. Simple, univariate random walk specifications can be rejected in favor of stationary alternatives. However, we argue that multivariate tests, which ask whether any linear combination of prices and exchange rates are stationary, have not necessarily provided meaningful rejections of nonstationarity. We also review a number of other theories of the long run real exchange rate -- including the Balassa-Samuelson hypothesis -- as well as the evidence supporting them. We argue that the persistence of real exchange rate movements can be generated by a number of sensible models and that Balassa- Samuelson effects seem important, but mainly for countries with widely disparate levels of income of growth. Finally, this paper presents new evidence testing the law of one price on 200 years of historical commodity price data for England and France, and uses a century of data from Argentina to test the possibility of sample-selection bias in tests of long-run PPP.

download in pdf format
   (651 K)

email paper

This paper is available as PDF (651 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Chapter 32 in Handbook of International Economics, Vol. 3. [Handbooks in Economics 3], edited by Gene Grossman and Kenneth Rogoff, p. 1647-1688, Amsterdam: Elsevier.

Users who downloaded this paper also downloaded these:
Friedman w2551 Lessons On Monetary Policy From The 1980's
Dornbusch w1591 Purchasing Power Parity
Engel w5646 Long-Run PPP May Not Hold After All
Edwards and Savastano w7228 Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?
Frankel and Rose w4865 A Survey of Empirical Research on Nominal Exchange Rates
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us