Purchasing power parity. Another look at the long-run data

This paper examines the purchasing power parity (henceforth PPP) using historical data and the cointegration approach. The results indicate that the exchange rate is cointegrated with the Wholesale Price Index (WPI) ratio but not with the Consumer Price Index (CPI) ratio. The cointegrating vector is close to (0, -1). For the CPI-based real exchange rates, however, we cannot reject the random walk hypothesis. The findings caution us on the use of general price indexes that give a large weight to nontraded goods and are therefore subject to long-run deviations from PPP.