Price Levels and Economic Growth : Making Sense of the PPP Changes between ICP Rounds
To the surprise of many observers, the 2005 International Comparison Program (ICP) found substantially higher purchasing power parity (PPP) rates, relative to market exchange rates, in most developing countries. For example, China s price level ind...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100318141230 http://hdl.handle.net/10986/3729 |
| Summary: | To the surprise of many observers, the
2005 International Comparison Program (ICP) found
substantially higher purchasing power parity (PPP) rates,
relative to market exchange rates, in most developing
countries. For example, China s price level index -- the
ratio of its PPP to its exchange rate -- doubled between the
1993 and 2005 rounds of the ICP. The paper tries to explain
the observed changes in PPPs. Consistently with the
Balassa-Samuelson model, evidence is found of a
"dynamic Penn effect," whereby more rapidly
growing economies experience steeper increases in their
price level index. This effect has been even stronger for
initially poorer countries. Thus the widely-observed static
(cross-sectional) Penn effect has been attenuated over time.
On also taking account of exchange rate changes and prior
participation in the ICP s price surveys, 99 percent of the
variance in the observed changes in PPPs is explicable.
Using a nested test, the World Bank s longstanding method of
extrapolating PPPs between ICP rounds using inflation rates
alone is out performed by the model proposed in this paper. |
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