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Economic Commentary

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.

The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit clevelandfed.org for updates.

Suggested Citation

Craig, Ben R. 2005. “The Growing Significance of Purchasing Power Parity” Federal Reserve Bank of Cleveland, Economic Commentary 4/1/2005.