Real disturbances, relative prices and purchasing power parity

Abstract

This paper tests a modified version of purchasing power parity which hypothesizes that real shocks that alter equilibrium relative prices between tradables and non-tradables are responsible for the deviations from purchasing power parity. Using cointegration/error-correction methods and quarterly data from the post Bretton Woods period, we find supportive evidence that productivity, government spending and real world oil price might account for deviations from purchasing power parity.