The so-called Harrod–Balassa–Samuelson model implies that relative prices of non-traded goods may be nonstationary and, hence, that PPP should preferably be tested on real exchange rates based on prices of traded goods only. A simple test for PPP among traded goods is proposed that can be applied to real exchange rates based on prices of all (that is, both traded and non-traded) goods. The study shows through simulations that the test is reliable for a sample size commonly considered in practice. Upon applying the test to bilateral real exchange rates based on the general CPI among a group of industrialized countries during the post Bretton Woods period, we find little evidence in favour of PPP among traded goods. This does not change when we use real exchange rates based on various components of the CPI.

Additional Metadata
Keywords Bretton Woods System, Commercial products, Foreign exchange, Non-traded goods, Purchasing power parity
Persistent URL dx.doi.org/10.1080/09603100500390711, hdl.handle.net/1765/11125
Series ERIM Article Series (EAS)
Journal Applied Financial Economics
Citation
Franses, Ph.H.B.F, & van Dijk, D.J.C. (2006). A simple test for PPP among traded goods. Applied Financial Economics, 16(1-2), 19–27. doi:10.1080/09603100500390711