PPP May not Hold for Agricultural Commodities

Abstract

We use the well known USDA dataset of real exchange rates to address the question of whether PPP holds for agricultural commodities. Both unit root tests and the recently proposed more powerful class of panel unit root tests, which take into account cross-section correlation across the units in the panel, are used. Properties of unit roots and panel tests are analyzed by Monte Carlo simulation. Summarizing, our results show that during the post-Bretton-Woods period of flexible exchange rates, PPP does not hold for agricultural commodities.Key words : Purchasing Power Parity, Agricultural Commodities, Monte Carlo, Unit Root tests, Panel unit root tests.