TY  - JOUR
AU  - Froot,Kenneth A.
AU  - Rogoff,Kenneth
TI  - Perspectives on PPP and Long-Run Real Exchange Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4952
PY  - 1996
Y2  - April 1996
UR  - http://www.nber.org/papers/w4952
L1  - http://www.nber.org/papers/w4952.pdf
N1  - Author contact info:
Kenneth A. Froot
Graduate School of Business
Harvard University
Soldiers Field
Boston, MA 02163
Tel: 617/495-6677
Fax: 617/496-7357
E-Mail: kfroot@hbs.edu

Kenneth S. Rogoff
Thomas D Cabot Professor of Public Policy
Economics Department
Harvard University
Littauer Center 216
Cambridge, MA 02138-3001
Tel: 617-495-4022
Fax: 617/495-7730
E-Mail: krogoff@harvard.edu
AB  - 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.
ER  -