The Problem
Exchange rate determination has always been an interesting yet controversial topic in macroeconomics. Developed by Gutav and Cassell in the early 20th century, the purchasing power parity (PPP) is
one of the most influential models of exchange rate determination over the past century. While the PPP gives a theoretical consistent explanation of exchange rate determination, empirical studies
of the 20th century tend to blatantly reject the theory of PPP (Meese and Rogoff, 1983; Froot and Rogoff, 1995; Pilbeam, 2006). Nevertheless, many economists still believe that the PPP is valid
explanation of exchange rate determination, at least over the long run (Patel, 1990; Abuaf and Jorion, 1990; Cheung, 1993). The research question of this study is therefore defined as:
1. Is the absolute PPP valid in the 21st century?
2. Is the relative PPP valid in the 21st century?
3. What are the underlying factors that lead to the validity/invalidity of the PPP?