Purchasing Power Parity Shattered: Exchange Rates Unleash Economic Shifts Worldwide
Real exchange rates were studied in 51 economies. The idea that prices should be similar across countries (PPP) was not supported for all countries, but it might be true for advanced and high-inflation economies. The Balassa-Samuelson hypothesis, which says that countries with higher productivity will have stronger currencies, was supported in both advanced and developing economies. Changes in terms of trade were also found to affect exchange rates.