Working Paper: NBER ID: w1475
Authors: Joshua Aizenman
Abstract: The purpose of this paper is to study analytically how the presence of transportation costs in a model of deviations from PPP affects the testing procedure of the PPP hypothesis The analysis shows that in the presence of transportation costs traditional regression analysis will tend to reject the PPP hypothesis even if goods markets are well arbitraged, because the values of the regression coefficients are affected systematically by considerations that are independent of the degree to which markets are arbitraged. Thus, the content of the ppp approach cannot be tested satisfactorily without considering the systematic effects of transportation costs and other costs of goods arbitrage.
Keywords: Purchasing Power Parity; Transportation Costs; Exchange Rates
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transportation costs (L91) | Rejection of the PPP hypothesis (F31) |
| Transportation costs (L91) | Relative price responsiveness (D41) |
| Relative price responsiveness (D41) | Rejection of the PPP hypothesis (F31) |
| Transportation costs (L91) | Elasticity of relative prices (P22) |