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The Growing Significance of Purchasing Power Parity

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The principle of purchasing power parity is central to the theoretical underpinnings of the analysis of many trade issues, but up until recently, there was little evidence that PPP held in the long run. Current research has changed that. The key to finding the evidence was realizing how to test for a long-run effect given the fact that exchange rates adjust to their longrun levels in a nonlinear way.

The principle of purchasing power parity is central to the theoretical underpinnings of the analysis of many trade issues, but up until recently, there was little evidence that PPP held in the long run. Current research has changed that. The key to finding the evidence was realizing how to test for a long-run effect given the fact that exchange rates adjust to their longrun levels in a nonlinear way.


Suggested citation: Craig, Ben R., 2005. "The Growing Significance of Purchasing Power Parity," Federal Reserve Bank of Cleveland, Economic Commentary, 04.01.2005.

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