The Growing Significance of Purchasing Power Parity
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 along-run effect given the fact that exchange rates adjust to their long-run levels in a nonlinear way.
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