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OECD Papers

OECD Papers provides access to a collection of substantive papers not published as books or articles in other OECD series or journals. All subjects are covered, from the latest OECD research on macroeconomics and economic policies, to work in areas as varied as employment, education, environment, trade, science and technology, development and taxation. OECD Papers are available on a subscription basis. Now a part of the OECD Journal

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A Contribution to the "Purchasing Power Parity vs. Market Exchange Rates for Use in Long-Term Scenarios" Discussion

Market Exchange Rates (MER) balance the demand and supply for international currencies, while Purchasing Power Parity (PPP) exchange rates capture the differences between the cost of a given bundle of goods and services in different countries. When undertaking multi-country analysis of environmental issues (such as climate change) that includes different currencies, a decision has to be made as to whether to use PPP or MER in the analytical framework. The distinction between them is particularly germane in inter-temporal studies that postulate future scenarios. PPPs are generally favoured for their closer link to welfare, but MERS are necessarily the basis of international trade, so it is difficult to choose between them. Some authors have noted some empirical regularity between them and have sought to exploit this to avoid choosing between PPP and MER. In this paper, it is shown that such ad hoc adjustments are not necessary when structural changes are accounted for.

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