Yeager (1958) tests how well movements of the floating Canadian dollar (with respect to the U.S. dollar) were explainable in terms of PPP during the period 1950–57. In that case only, each competitive good’s international price ratio … would have to equal the official free exchange rate exactly, as a result of quick acting competitive arbitrage; and what is true for each and every good, must be true for the average index number of price …21. IMFBlog2019-03-27T14:54:00-04:00October 6, 2015|, (Versions in Español, عربي, 中文, Français, Русский and 日本語). 167–82. 979–90. 62 (March1972) p. 150. 560–78. 26 (November1944) pp. For Cassel, the definitive test was a comparison of the pound/dollar PPP and exchange rate during the floating-pound period that followed World War I.74Cassel (1925 c) computes R/PPP (both numerator and denominator expressed in number of pounds per dollar) monthly for the period 1919–24. HicksJ. Although his study is neither mathematical nor econometric, Stolper (1948) can be credited with the earliest use of an aggregate model to test the PPP theory. 1–5. GregoryT. Brisman (1933, p. 72) claims that the PPP theory appeared first in Sweden more than 20 years prior to the Bank Restriction Period. First, China’s economic transformation – away from export- and investment-led growth and manufacturing, in favor of a greater focus on consumption and services. 107–42. Consider two extreme cases. Nevertheless, the findings are implicitly supportive of PPP. 92–93) observes that relative PPP “is a reasonable approximation for the analysis of short-run monetary disturbances of the type with which Cassel was concerned and provides a rough guide for policy makers obliged to decide the magnitude of exchange-rate changes. Houthakker (1962 a) had applied absolute PPP to reach the conclusion that the U.S. dollar was overvalued by about 20 per cent in 1962. CasselGustav“The Depreciation of the German Mark,”Economic JournalVol. 3). 149–50; 1928 a, pp. 66–67), many have mentioned this deficiency of relative price parity.45 The extent to which the theory is affected, of course, depends on the magnitude of the changes, and an assessment analogous to that of the impact of tariff and transport-cost levels on absolute parity is applicable. 873–91. One criticism concerns the choice of independent variable. by SeymourHarris (Harvard University Press1948) pp. 470–76. Second, a variety of product-price or factor-cost measures may be used in the definition of PPP. 55 (March1965) pp. It is not obvious that a systematic difference in PPP/R among countries implies a corresponding difference in their internal price ratios, and hence a case against the validity of the PPP theory. S.Minhas and R. M.Solow“Capital-Labor Substitution and Economic Efficiency,”Review of Economics and StatisticsVol. With this statement applying to two countries, the value of one country’s currency relative to the other’s is the short-run equilibrium exchange rate, and the ratio of the internal purchasing powers or price levels defines the absolute PPP (PPPabs). For each country, he computes the ratio of the GNP price deflator (representing the general price index) to the WPI of manufactured goods (representing the price index of traded goods) for the year 1961, taking 1953 as the base year. Thus, a theory of absolute price parity results.13, The internal purchasing power of a currency is sometimes referred to merely as its “purchasing power,” and is called “buying power” or “paying power” in Cassel’s early writings. An obvious test of PPP theory is the following: Calculate a time series of relative PPP during a period when the exchange rate is floating and compare it with the corresponding time series of the floating rate. Objections of a more specific nature are offered by Metzler (1947, pp. Ill), and criticized by Haberler (1944 a), Yeager (1966, p. 47), and Balassa and Schydlowsky (1968, pp. A relationship between the exchange rate, the PPP, and variables representing the impact of the bias may be used to determine equilibrium exchange rates, evaluate existing rates, and predict the movements of floating rates. The former assumption ensures that price is equal to ULC, the latter that the same percentage deviation between price and ULC occurs in each country. theory had among other economists. HaberlerGottfried“Comments on ‘National Central Banking and the International Economy,’” in International Monetary Policies Board of Governors of the Federal Reserve System Postwar Economic StudiesNo. 144–46). For both the franc and the pound, Bunting finds substantial deviations of the exchange rate from the PPP even using lags. This last conclusion is disputed by Crump (1925), who plots three R/PPP series monthly for the period 1920–24, one of which is Cassel’s series and the other two are computed from alternative price indices for the United States and the United Kingdom.