Quasi Purchasing Power Parity

Several recent studies have found evidence of purchasing power parity by using long time series of data to combat the low power of unit root tests. The ability to reject unit roots in real exchange rates, however, only implies that PPP holds in the absence of structural change. We test for multiple structural changes in six real exchange rates, and find strong evidence against both the unit root and the no-structural-change hypotheses. We call this result quasi purchasing power parity. When structural change is accounted for, real exchange rates display mean reversion that is much faster than previously calculated. (C) 1998 John Wiley & Sons, Ltd.