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Purchasing Power Parity
The Purchasing Power Parity (PPP) is a theory of exchange rate determination. It asserts (in the most common form) that the exchange rate change between two currencies over any period of time is determined by the change in the two countries' relative price levels. Because the theory singles out price level changes as the overriding determinant of exchange rate movements it has also been called the ‘inflation theory of exchange rates'.
During the 1990s PPP has attracted an enormous amount of interest. Presumably driven by the disbelief that such an intuitively appealing proposition about exchange rate behavior had found little support in the data, researchers have embarked in a "search" for PPP using increasingly sophisticated time series methods. The early 1990s have seen a proliferation of studies testing for PPP over the long-run either by testing whether nominal exchange rates and relative prices move together (co integrate) or by testing whether......

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Approximate Word Count: 2061
Approximate Pages: 9 (250 words per double-spaced page)

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