Long-run purchasing power parity: evidence from some European Monetary System countries

Abstract

Long-run purchasing power parity (PPP) for five countries participating in the European Monetary System (EMS) during the recent floating exchange rate period is studied. Using new econometric techniques, evidence is found supporting long-run purchasing power parity. Moreover, the long-run PPP relationship is generally stable throughout the period since the dissolution of the Bretton-Woods period, even with the advent of the European Monetary System. Frequent realignments within the EMS may have served to maintain competitiveness between member countries.