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2020 | OriginalPaper | Buchkapitel

3. International Parity Conditions

verfasst von : Peijie Wang

Erschienen in: The Economics of Foreign Exchange and Global Finance

Verlag: Springer Berlin Heidelberg

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Abstract

The idea of PPP can be traced back to the medieval times, though the theory is more formally contributed to Cassel (1918, 1922), developed during a period that endured noticeable inflation in the world for the first time and the inflation rate as well varied noticeably between major trading nations. Therefore, PPP has been associated with inflation and inflation differentials from the start, being thrust in to a theory by real world issues. Cassel (1918) states that “The rate of exchange between two countries is primarily determined by the quotient between the internal purchasing power against goods of the money of each country.”, and remarks that “The general inflation which has taken place during the war has lowered this purchasing power in all countries, though in a very different degree, and the rates of exchanges should accordingly be expected to deviate from their old parity in proportion to the inflation of each country.” A testimony is then reached: “At every moment the real parity between two countries is represented by this quotient between the purchasing power of the money in the one country and the other. I propose to call this parity ‘the purchasing power parity’.”

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Vorheriges Kapitel Exchange Rate Arrangements and International Monetary Systems

Nächstes Kapitel Balance of Payments and International Investment Positions

The regression equation is s_t = α + β (p_{h, t} − p_{f, t}) + v_t, to test the restrictions α = 0 and β = 1. PPP in the form of Eq. (3.4) is confirmed when α = 0 and β = 1.

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Titel: International Parity Conditions
verfasst von: Peijie Wang
Verlag: Springer Berlin Heidelberg
Buch: The Economics of Foreign Exchange and Global Finance
Print ISBN: 978-3-662-59269-4

Electronic ISBN: 978-3-662-59271-7

Copyright-Jahr: 2020
DOI: https://doi.org/10.1007/978-3-662-59271-7_3