Munich Personal RePEc Archive

Price Indexes are a Problem for Testing PPP

Wallace, Frederick (2015): Price Indexes are a Problem for Testing PPP.

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Abstract

This note illustrates a problem in purchasing power parity studies that test for stationarity of the real exchange rate. If the real rate series is constructed using price indexes then the real exchange rate may not be stationary even if the law of one price always holds for every good in the indexes.

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