Purchasing power parity in high-inflation countries: further evidence

Abstract

It has been long recognized that a situation in which the purchasing power parity (PPP) calculations may prove insightful is when large movements in the domestic general price level (usually of monetary origin) overshadow the effects of other factors on the exchange rate. In this paper, we attempt to test the empirical validity of PPP as a long-run equilibrium relationship in a sample of thirteen “high-inflation” countries using quarterly data over the “modern floating” period and recently developed techniques of cointegration and error-correction model. We find empirical evidence in favor absolute or relative versions of PPP in Argentina, Brazil, Israel, Mexico, Peru, South Africa, Uruguay, and Yugoslavia. Our results, when analyzed in conjunction with actual inflation rates of these countries, suggest that PPP may hold over a range of inflationary experience; although it is likely to hold more consistently where the inflation rate is very high.