Testing deviations from purchasing power parity

Joshua Aizenman

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

This paper studies analytically how the presence of transportation costs in a model of deviations from purchasing power parity (PPP) affects the testing procedure of the PPP hypothesis. The analysis shows that in the presence of transportation costs traditional regression analysis will tend to reject the PPP hypothesis even if goods markets are well arbitraged, because the values of the regression coefficients are affected systematically by considerations that are independent of the degree to which markets are arbitraged. Thus, the content of the PPP approach cannot be tested satisfactorily without considering the systematic effects of transportation costs and other costs of goods arbitrage.

Original languageEnglish
Pages (from-to)25-35
Number of pages11
JournalJournal of International Money and Finance
Volume5
Issue number1
DOIs
StatePublished - 1 Jan 1986
Externally publishedYes

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