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Investigates the doctrine of Relative Purchasing Power Parity. Mixed evidence is found supporting the concept when using a method analogous to that used by Lucas in testing the quantity theory of money. Relative Purchasing Power Parity is not consistently rejected in the long run between Canada and the United States and between Japan and the United States using quarterly data covering two separate periods: 1957 QI‐1973 QII, and 1973 QIII‐1989 QIV. Given the inconclusive results associated with relying on the methodology of Lucas, considers two alternatives: first, where the requisite smoothed time series are obtained via appropriate autoregressive integrated moving average filters and, second, where cointegration techniques are employed. In these instances, the results are unequivocal. Relative Purchasing Power Parity does not hold.

The purchasing power parity hypothesis is investigated within a highly economically integrated set of nations, namely the European Monetary System. We use the Phillips‐Hansen Fully Modified Ordinary Least Squares procedure, which for the first time allows for an unrestricted cointegration test of the PPP doctrine. We sequentially test for the weak and strong form of PPP.

The equation of unified knowledge says that S = f (A,P) which means that the practical solution to a given problem is a function of the existing, empirical, actual realities and the future, potential, best possible conditions of general stable equilibrium which both pure and practical reason, exhaustive in the Kantian sense, show as being within the realm of potential realities beyond any doubt. The first classical revolution in economic thinking, included in factor “P” of the equation, conceived the economic and financial problems in terms of a model of ideal conditions of stable equilibrium but neglected the full consideration of the existing, actual conditions. That is the main reason why, in the end, it failed. The second modern revolution, included in factor “A” of the equation, conceived the economic and financial problems in terms of the existing, actual conditions, usually in disequilibrium or unstable equilibrium (in case of stagnation) and neglected the sense of right direction expressed in factor “P” or the realization of general, stable equilibrium. That is the main reason why the modern revolution failed in the past and is failing in front of our eyes in the present. The equation of unified knowledge, perceived as a sui generis synthesis between classical and modern thinking has been applied rigorously and systematically in writing the enclosed American‐British economic, monetary, financial and social stabilization plans. In the final analysis, a new economic philosophy, based on a synthesis between classical and modern thinking, called here the new economics of unified knowledge, is applied to solve the malaise of the twentieth century which resulted from a confusion between thinking in terms of stable equilibrium on the one hand and disequilibrium or unstable equilibrium on the other.

The research for this paper focuses on the implied expected exchange rates between the U.S. dollar and the Deutsche Mark. We use one year debt yield and one year inflation forecasts to derive expected exchange rates based on uncovered interest arbitrage and on the purchasing power parity relationship. We also explore the explanatory power of combinations of these two alternative expected exchange rates including what they might reveal regarding exchange rate premiums. Our results indicate that a combination of the two approaches which models a risk premium may be beneficial. We indicate some further work to be done along this line and provide a summary and conclusion based on the work reported here.

In what seems as an infinitely ongoing debate regarding the purchasing power parity (PPP) theory, this paper seeks to question the strength of the scientific “evidence” put forward by the PPP revisionists

In this paper, the validity of the PPP revisionists' scientific evidence supporting long‐run PPP is questioned based on the replication of an influential review study that is considered by PPP revisionists to exhibit “some of the strongest evidence” in favour of the PPP theory.

By simulation experiments it is demonstrated that the traditional PPP unit root tests are non‐robust to the empirically identified (G)ARCH distortions. Due to (G)ARCH distortions, over‐rejections for the traditional unit root tests are shown to be a problem that potentially misleads researchers to believe that long‐run PPP holds under circumstances when it is in fact not valid. As a potential remedy to this problem, a new unit root test is introduced which is robust to conditional heteroscedasticity disturbances, and in contrast to traditional unit root tests, it exhibits no significant empirical support for the PPP theory.

The study illustrates that the PPP revisionists' unit root tests cannot reliably test the PPP hypothesis in the presence of (G)ARCH distortions, due to bad power and size properties. Perhaps it is time to conclude that, based on the currently existing research, it is virtually impossible to empirically come to a credible conclusion regarding whether long‐run PPP holds or not.

For the past decades, issues concerning the impact of economic integration on financial integration, especially exchange rate integration, has been criticized among several regions such as ASEAN. This chapter intends to: (i) test for the exchange rate integration among the ASEAN-5, including Indonesia, Philippines, Malaysia, Singapore, and Thailand, using panel data techniques; and (ii) determine the impact of economic integration on the level of exchange rate integration among the ASEAN-5 countries. The purchasing power parity (PPP) is tested using panel unit root tests on monthly data. The results confirm the PPP among the ASEAN-5 countries due to lower transaction costs from ASEAN agreements. The chapter applies Multivariate GARCH (M-GARCH) models using daily data to determine the level of exchange rate integration among the ASEAN-3, including Malaysia, Singapore, and Thailand. The results of panel cointegration tests using quarterly data of economic integration and exchange rate integration confirm the impact of international trade openness on exchange rate integration. With free trade agreements leading to lower trade barriers, lower transaction costs, and low transportation costs, the economic integration among ASEAN countries practically leads to a higher degree of exchange rate integration. The findings imply that trade liberalization has the strongest effect on the real exchange rate. As such, regulators of ASEAN countries should pay more attention to the exchange rate policies of each other because of the interdependence of their exchange rates.

The purpose of this paper is to extend the methodology proposed in Majumder et al. (2012) for the estimation of the item-specific purchasing power parities (PPPs) within countries, to the cross-country context. It estimates item-specific intra-country PPPs (i.e. spatial prices) and inter-country PPPs in a unified framework using unit records of household food expenditures from three Asian countries: India, Indonesia and Vietnam, covering contemporaneous time periods. The study addresses a key limitation of the International Comparison Program (ICP) exercise, namely, that it treats all countries, large and small, as homogeneous entities. Moreover, it directly calculates bilateral PPPs between countries based on their expenditure patterns and prices alone and directly estimates the price-level indices (PLI) and their standard errors, allowing formal tests of the hypothesis of PLI being unity. The usefulness of the estimated PPPs is illustrated by applying them to comparisons of real food expenditures between the three countries, and benchmarking the comparisons with those using the ICP PPPs.

The methodology is based on the fact that a spatial price index can be viewed as a true cost of living index (TCLI). Using a general cost function underlying the Rank 3 quadratic logarithmic systems, the TCLI is calculated for a reference utility level.

The study provides formal statistical tests of the hypothesis of item invariance of the PPPs. The usefulness of the proposed methodology is illustrated by applying the estimated PPPs in comparisons of food expenditures between subgroups in the three countries. The sensitivity of the expenditure comparisons to the use of item-wise PPPs underlines the need to provide price information on highly disaggregated PPPs to a much greater extent than the ICP has done to date.

The choice of these three Asian countries was dictated by the fact that, though comparability of items between them remains an issue as with all cross-country comparisons. Also, in the absence of price data, this study followed the practice in Majumder et al. (2012, 2015a, 2015b) in using as proxies the raw unit values of the food items, but adjusted for quality and demographic factors using the procedure introduced by Cox and Wohlgenant (1986) and extended by Hoang (2009).

It addresses some limitations of the ICP, namely, ICP treats all countries as single entities with the purchasing power of the country’s currency assumed to be the same in all regions within the country, ICP uses the US dollar as the numeraire (this ignores the fact that the PPPs required in bilateral welfare comparisons between developing countries with vastly different consumption habits from the “international norm” are quite different from the ICP PPPs) and ICP uses distribution invariant prices to calculate PPPs, which overlooks the fact that the poor pay different prices from the “representative” individual.

This study highlights the importance of estimating and using item-specific PPPs in cross-country comparisons by formally testing and rejecting the assumption of item invariant PPPs and by providing empirical evidence that they do make a difference to the welfare comparisons between countries. This study provides PPPs based on food items only, which may be more relevant for poverty comparisons.

It introduces, for the first time, the concept of item-specific PPPs between countries as estimable parameters and operationalizes this concept by using them in cross-country welfare comparisons.

The purpose of this paper is to review the literature on the determinants of the exchange‐rate by examining the flow theory approach, purchasing power parity theory, the monetary approach and the assets market approach.

Some recent research has reported results more favourable to long‐run purchasing‐power parity (PPP) for exchange rates within the European Monetary System (EMS) than for those outside it. This is inconsistent with the predictions of theories that regard the EMS as a means of acquiring anti‐inflation credibility for the governments of relatively high‐inflation countries. Results of tests on a wide range of intra‐EMS exchange rates suggest a tendency to under‐adjust for cumulative price differentials, and that the DM‐FF rate is atypical in its adherence to long‐run PPP.