The Purchasing Power Parity and Lebanese Exchange Rates: A Tale from the Crisis Years
- Introduction
It is widely established in the economic literature that the Purchasing Power Parity (PPP) holds pretty well during hyper-inflationary times. And, to recap, the PPP hypothesis stipulates that the exchange rate between two countries reflect their price differential (or the difference in their consumer price index). It is assumed that when PPP holds between two countries, a given basket of goods will be of the same price in both countries, after controlling for the exchange rate. In relative or dynamic terms, it also assumes that changes in the exchange rate should be equal to the differential in inflation rates between the two countries. If not, then PPP doesn’t hold.
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