AN INTERNATIONAL COMPARISON OF PRICES AND EXCHANGE-RATES - A NEW TEST OF PURCHASING POWER PARITY

This paper introduces a new approach based on Divisia index numbers to test PPP with both short-run and long-run data for all major currencies simultaneously. The short-run results indicate that the predictions of PPP do not hold up at all well. On the other hand, however, the long-run data are quite consistent with the PPP hypothesis. The results also identify five years as a broad measure of the length of the long run insolar as PPP is concerned. © 1990.