THE LAW OF ONE PRICE, BORDERS AND PURCHASING POWER PARITY

John Pippenger

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: Conventional wisdom claims that the Law of One Price (LOP) fails in commodity markets, commodity borders are wide and Purchasing Power Parity (PPP) fails. But the evidence supporting those claims comes primarily from retail markets where price differentials do not represent risk-free profits. As we show, prices from a wide range of auction markets strongly support the LOP, reject wide borders and do not reject PPP. In addition, recognizing the difference between retail and auction markets helps explain several puzzles associated with exchange rates. The Keynesian paradigm dominates macroeconomics. We question that dominance for two reasons: (1) by reviving PPP we reject Liquidity Preference and support Loanable funds and (2) we reject the standard Keynesian assumption that commodity markets clear slowly and asset markets clear rapidly. Whether commodity or asset, retail markets clear slowly. Whether commodity or asset, auction markets clear rapidly.

Keywords: Social; and; Behavioral; Sciences (search for similar items in EconPapers)
Date: 2022-11-28
New Economics Papers: this item is included in nep-opm
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