The Authors State That Empirical Tests of Purchasing Power Parity

question 39

Essay

The authors state that empirical tests of purchasing power parity "have, for the most part, not proved PPP to be accurate in predicting future exchange rates." The authors then state that PPP does hold up reasonably well in two situations. What are some reasons why PPP does not accurately predict future exchange rates, and under what conditions might we reasonably expect PPP to hold?

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Definitions:

Payment Stream

A series of payments made over time, such as monthly mortgage or loan payments, or regular investment contributions.

Equivalent

Items or quantities that are equal in value, function, or meaning.

Equal Payments

Regular payments of the same amount over a specified period, typically used in installment plans or loans.

Paid Off

A term indicating that a debt or obligation has been fully settled and no amount remains due.