Perspective on PPP and the Long Run Real Exchange Rate.
This paper takes a critical look at the relationship between purchasing power parity (PPP) and the long run real exchange rate. The discussion will center on the research of Froot and Rogoff (1994), and highlight other relevant literature where necessary or appropriate. The study finds that there is clear reason for the PPP/long run real exchange relationship to be controversial: there is no single multivariate model (that aims to prove that prices and exchange rates are stationary) capable of proving nonstationarity. 23 pgs. 37 f/c. 5b.
