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Open Economies Review

, Volume 26, Issue 5, pp 869–891 | Cite as

Inter-Temporal Purchasing Power Parity

  • Janice Boucher Breuer
  • Vikram Kumar
  • Shyam Gouri Suresh
Research Article

Abstract

We adapt the Casselian version of purchasing power parity to a two-period framework. In this framework, we show that inter-temporal trade plays a role and can drive a wedge between the nominal exchange rate and relative prices. The size of trade flows, the real interest rate, and the constraint on trade balance over two periods establish the conditions under which Casselian and inter-temporal purchasing power parity hold. We test our model using consumer price indices and bilateral trade flows between the United States and the United Kingdom. We find evidence favorable to inter-temporal purchasing power parity.

Keywords

Purchasing power parity Real exchange rate Inter-temporal trade 

JEL Classification

F31 

Notes

Acknowledgments

The authors gratefully acknowledge the helpfulness of comments from the editor of this journal and anonymous reviewers. Any errors that remain are our own.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  • Janice Boucher Breuer
    • 1
  • Vikram Kumar
    • 2
  • Shyam Gouri Suresh
    • 2
  1. 1.Department of EconomicsUniversity of South CarolinaColumbiaUSA
  2. 2.Davidson CollegeDavidsonUSA

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