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International Evidence on Purchasing Power Parity: A Study of High and Low Inflation Countries
Author(s) -
Mehdi Monadjemi,
John Lodewijks
Publication year - 2021
Publication title -
journal of economics and management sciences
Language(s) - English
Resource type - Journals
eISSN - 2576-3016
pISSN - 2576-3008
DOI - 10.30560/jems.v4n3p1
Subject(s) - economics , purchasing power parity , inflation (cosmology) , monetary economics , exchange rate , relative purchasing power parity , currency , international fisher effect , purchasing power , international economics , real interest rate , macroeconomics , monetary policy , fisher hypothesis , theoretical physics , physics
The purpose of this article is to select a sample of low inflation countries and high inflation countries and examine the long run validity of the relative Purchasing Power Parity doctrine. We explore the notion that countries with historically low inflation experience strong and stable currency and those with a continuous high inflation face weak and depreciating currencies. After a review of the literature, a theoretical model is developed for the relationship between inflation and exchange rate changes. This is followed by some graphical annual time series and empirical results for selected countries. We find our hypothesis is supported for high inflation countries. We then explore productivity differences and their impact on real exchange rates.

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