The Purchasing Power Parity Debate
NBER WORKING PAPER SERIES
THE PURCHASING POWER PARITY DEBATE Alan M. Taylor Mark P. Taylor Working Paper 10607 http://www.nber.org/papers/w10607 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 June 2004
Forthcoming in Journal of Economic Perspectives. For their helpful comments we thank, without implicating, Menzie Chinn, Richard Clarida, Bradford DeLong, Charles Engel, James Hines, James Lothian, Bennett McCallum, Michael Melvin, Peter Neary, Maurice Obstfeld, Lawrence Officer, David Papell, David Peel, Phillip Lane, Kenneth Rogoff, Andrew Rose, Lucio Sarno, Timothy Taylor, Eric van Wincoop and Michael Waldman. The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research. ©2004 by Alan M. Taylor and Mark P. Taylor. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Purchasing Power Parity Debate Alan M. Taylor and Mark P. Taylor NBER Working Paper No. 10607 June 2004 JEL No. F31, F41 ABSTRACT Originally propounded by the sixteenth-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it first was advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a
THE PURCHASING POWER PARITY DEBATE Alan M. Taylor Mark P. Taylor Working Paper 10607 http://www.nber.org/papers/w10607 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 June 2004
Forthcoming in Journal of Economic Perspectives. For their helpful comments we thank, without implicating, Menzie Chinn, Richard Clarida, Bradford DeLong, Charles Engel, James Hines, James Lothian, Bennett McCallum, Michael Melvin, Peter Neary, Maurice Obstfeld, Lawrence Officer, David Papell, David Peel, Phillip Lane, Kenneth Rogoff, Andrew Rose, Lucio Sarno, Timothy Taylor, Eric van Wincoop and Michael Waldman. The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research. ©2004 by Alan M. Taylor and Mark P. Taylor. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Purchasing Power Parity Debate Alan M. Taylor and Mark P. Taylor NBER Working Paper No. 10607 June 2004 JEL No. F31, F41 ABSTRACT Originally propounded by the sixteenth-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it first was advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a
References: Figure 3 Harrod-Balassa-Samuelson Effects Emerge: log Price Level versus log Per Capita Income This figure shows countries ' log price level (vertical axis) against log real income per capita for 1995, 1950, and 1913, with the U.S