Handbook of Exchange Rates

6.1 Introduction

This essay, which draws on Officer (2006), surveys the application of purchasing power parity (PPP) to historical experiences. To be considered in the historical domain and therefore included in this essay, a study's time period must fully antedate the year 1940. This arbitrary bar means that World War II and the Bretton Woods system are “post-history.” The many fixed and floating-exchange-rate episodes before Bretton Woods enable a logical ordering of the essay. The literature is surveyed according to historical periods, with each period delineated according to exchange-rate regime or regimes.

Section 6.2 categorizes PPP theories, while Section 6.3 presents applications of PPP to the premodern period. Section 6.4 outlines the various methods of testing the theory, and Section 6.5 discusses the all-important price concept in PPP. Tests of the theory for the modern period (eighteenth century to 1940) are covered in Section 6.6. PPP analysis of the United States return to the gold standard is discussed in Section 6.7. Section 6.8 looks at actual situations (in the interwar period) in which PPP was applied to determine a new exchange rate. Concluding comments are in Section 6.9.