PURCHASING POWER PARITY - AN ANALYSIS BASED ON THE EVOLUTIONARY SPECTRUM

The bulk of the literature on the empirical validation of the purchasi ng power parity (PPP) has been based on cointegration, although on rar e occasions band-spectrum analysis has also been used. The former is t ied down to the use of 'notional' time in the analysis of systems away from equilibrium, and the latter is circumscribed by the Slutzky-Yule effect. Both these drawbacks are sought to be remedied in the present paper, which seeks to bring to bear upon the PPP a new approach deriv ed from the concept of a time-varying spectrum. Both absolute and rela tive versions of the doctrine are tested for ten advanced economies ov er the post-1973 period. Uniform rejection of the PPP occurs with the US $ as base, but with centring on the DM, the evidence seems to be su pportive of the PPP (in its relative version) for three European count ries.