Stewart, Chris (2023) Re-evaluating whether absolute or relative purchasing power parity is being tested when using price indices. (Discussion Paper) Kingston upon Thames, U.K. : Kingston University. (Economics Discussion Paper, no. 2023-1)

Abstract

A growing body of research suggests that the literature applying unit root, stationarity and cointegration tests of long run purchasing power parity (PPP) and the law of one price (LOP) with price index data test relative PPP/LOP and not absolute PPP/LOP. We argue that such tests cannot determine when long run relative PPP/LOP is rejected and therefore are not tests of relative PPP/LOP. These are not tests of strong absolute PPP/LOP either. We contend that they are tests of weaker forms of absolute PPP/LOP and that determining which form of absolute PPP/LOP is useful in terms of, for example, establishing the form of long run flexible-price monetary exchange rate model that it implies.

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Official URL:	https://ideas.repec.org/p/ris/kngedp/2023_001.html
Item Type:	Monograph (Discussion Paper)
Uncontrolled Keywords:	absolute purchasing power parity; relative purchasing power parity; the law of one price; price indi
Research Area:	Research Areas > Economics and econometrics
Faculty, School or Research Centre:	Faculty of Arts and Social Sciences
Series Name:	Economics Discussion Paper
Date Deposited:	09 May 2023 12:35
Last Modified:	09 May 2023 12:35
URI:	https://eprints.kingston.ac.uk/id/eprint/53742

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