Dynamic Purchasing Power Parity Theory And Empirical Analysis

After pondering over the thinking of purchasing power parity (PPP), the paper advances dynamic purchasing power parity theory (DPPP): currency's exchange rate will trend to its long-run equilibrium exchange rate (purchasing power) if this country has a high economic growth rate;while currency's exchange rate of high-income country is fluctuating around its purchasing power.First we prove this theory based on the balance of international income and expenses. Then we test it empirically using two kinds of data: 1 , Based on the section data given by international comparative project, the result is the comparative price has a downtrend to 1 with average national income increasing;2, Based on the time-series data given by Penn World Table, the result shows currency's real exchange rate of country with a continuously high GDP growth rate has a downtrend to 1, and real exchange rate of high-income country is fluctuating around 1. Tests above indicate DPPP is true basically.In the last part the Granger causality is analyzed between GDP growth rate and the change of exchange rate. There is no enough evidence to illustrate that appreciation lead to the decline of GDP growth rate, but it is significant that GDP growth rate Granger Cause the change of exchange rate for the counties with continuously high growth rates. In analysis of Japan, we find that Japanese depression is due to decline of investment. Given the differences in development stage between China and Japan, RBM appreciation could not lead to condition like Japan's.