Understanding the empirical literature on purchasing power parity: The post-Bretton Woods era

This paper argues that the empirical failure of statistical tests of PPP in post-Bretton Woods data is largely due to the low power of the tests employed. This result is demonstrated using Monte Carlo experiments on the size and power of different testing procedures. A new procedure based on Horvath and Watson (Econometric Theory, 11, pp. 984-1014, 1995) has greater power than previous approaches. Using the Horvath-Watson procedure we find moderate evidence in favor of PPP in the post-Bretton Woods era. (JEL F31, C15). (C) 1997 Elsevier Science Ltd.