Causal and frequency analyses of purchasing power parity q

A century after its development, the purchasing power parity theorem, which links exchange rates with prices, remains one of the most popular and influential economic theories. This study examines the relationship between exchange rates and prices from the perspectives of causality and spillovers. Using a panel of countries and advanced statistical methods, we estimate spillovers for all combinations of origins and destinations at different frequency bands, and show that their relationship is time-varying and multidirectional and has some validity at short and long time horizons. Furthermore, using exchange rate regimes, economic structures, currency crises, and trade openness, we identify economic conditions influencing the size and direction of spillovers. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

The study examines the relationship between exchange rates and prices, finding that this relationship is time-varying, multidirectional, and valid at short and long time horizons. Economic conditions such as exchange rate regimes, economic structures, currency crises, and trade openness influence the size and direction of spillovers.