Handbook of Exchange Rates

6.9 Conclusions

Why has PPP endured through the centuries and under the rubric of various and varying exchange-rate experiences and monetary standards? This survey of the application of PPP to historical experiences illustrates the controversial nature of PPP—and that nature is one reason for the durability and endurance of PPP. The second reason is that PPP is fundamentally a simple and intuitively appealing theory. The third reason is that it has an inherent concreteness that other exchange-rate theories lack.

Clearly, this survey shows that there is mixed empirical evidence for the applicability of PPP, whether in explaining exchange-rate behavior or in establishing new exchange-rate levels. Yet that result gives rise to a fourth reason for the robustness of PPP: Whether or not PPP is deemed to hold empirically, it is useful to know the extent to which the theory is valid. Measurement of deviations from PPP is important both for macroeconomic historians and for economic policy makers. As Houthakker (1923, pp. 296–297) wrote: “All in all, it would be most unwise to ignore the unique insight which PPP calculations can afford.”

¹However, the essay discusses only relative PPP, a reflection of the PPP literature with a historical bent, itself a result of a paucity of data on absolute price levels in the pre-1940 period.

²See Burns (1916, p. 417), Einzig (1963, p. 44), and Officer (1948, p. 27).

³Citing the Roman historian Pliny, Einzig (1963, p. 45) reports that “merchants importing ...