Abstract
The failure of strict purchasing power parity to hold in the 1970s can be explained by the preponderance of the real shocks which involve large changes in sectoral relative prices. Previous work has attempted to measure these effects by using proxies for the prices of traded and nontraded goods. In this study the author uses the Divisia price variance as a measure of changes in the structure of relative prices to reexamine the case for real shocks causing deviations from parity. Using data from 21 OECD countries, the results show that an increase in the variance of relative prices at home (in relation to that abroad) depreciates the currency. Copyright 1991 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia
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