The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Purchasing Power Parity

  • Lucio Sarno
Reference work entry


This article expounds the purchasing power parity (PPP) hypothesis as a theory of exchange rate determination. The long history of PPP and its contribution to thinking in international finance is discussed, with reference to implications both for open economy theory and for economic policy. The large literature on empirical testing of the validity of PPP is reviewed, with particular reference to work carried out since 1990.


Aggregate demand Balassa, B. Beggar-thy-neighbour Bretton Woods system Cassel, G. Co-integration Common factors Consumer price indices Crawling peg exchange-rate regime de Malynes, G. Deflation Exchange rate depreciation Exchange rate dynamics Exchange rate regimes (empirics) External competitiveness Fixed exchange rates Flexible exchange rates Gold standard Gross domestic price deflators Haberler, G. Harrod, R. Hyperinflation Imperfect competition Indexation Inflation Inflationary expectations Information costs International arbitrage International capital flows International finance International portfolio diversification International trade barriers Johnson, H. Keynes, J. M. Kravis, I. Labour market contracts Law of one price Microfoundations Monetary policy Monte Carlo methods Mundell, R. Mundell–Fleming model Nominal exchange rates Nominal interest rates Nurkse, R. Open economy macroeconomics Price stability Productivity differentials Purchasing power disparities Purchasing power parity (PPP) Quantity theory of money Rational expectations Real exchange rates Real interest rates Real price ratios Ricardo, D. Rueff, J. Salamanca School Samuelson, P. Spatial arbitrage Spatial price differentiation Sticky prices Strong (absolute) purchasing power parity Terms of trade Trade barriers Unit roots Viner, J. Weak (relative) purchasing power parity White noise Wholesale price indices Yeager, L 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Lucio Sarno
    • 1
  1. 1.