Purchasing Power Parity in the Long Run: A Test of the Dollar/Pound Exchange Rate (1890-1978)

This paper tests the Purchasing Power Parity hypothesis by analyzing the long-run tendency of the dollar-pound exchange rate using data since 1890. Two different models are considered: (i) a naive model and (ii) a modified monetary model. The conditions of proportionality and of symmetry cannot be rejected when using the naive model. The final results using the monetary model, however, indicate that the existence of permanent deviations from PPP cannot be ruled out. (Printed by permission of the publisher.)