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ARE THE CPI AND WPI APPROPRIATE MEASURES TO USE FOR TESTING THE PPP HYPOTHESIS?

April 26, 2017appropriate CPI Hypothesis measures PPP Testing WPI

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ARE THE CPI AND WPI APPROPRIATE MEASURES TO USE FOR TESTING THE PPP HYPOTHESIS?

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This paper evaluates the commonly used CPI and WPI proxies for the real exchange rate by comparing them to new measures constructed from a different data series of traded and nontraded goods prices. The tests provide mixed evidence in favor of using the general price indexes to construct measures of the real exchange rate.