A triangular purchasing power parity hypothesis: A rejoinder

• Published date: 01 March 2021
• Author: Peijie Wang,Zhiyuan Liu
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/twec.13089

World Econ. 2021;44:849–854.

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849

wileyonlinelibrary.com/journal/twec

Received: 17 November 2020

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Accepted: 4 January 2021

DOI: 10.1111/twec.13089

INVITED REVIEW

A triangular purchasing power parity hypothesis: A

rejoinder

PeijieWang1,2

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ZhiyuanLiu3

1Plymouth Business School, University of Plymouth, Plymouth, UK

2Institute of World Economy, Fudan University, Shanghai, China

3Department of International Economics and Trade, Business School, Beijing Language and Culture University, Beijing,

China

We are delighted to see Dr Alan King's (King A, 2021, AK thereafter) interest and curiosity in the

subject of PPP and, in particular, this paper of ours (Wang & Liu,2018). AK spends the first half of

his paper going though and explaining our paper. So, we jump to and start with his critique of the

triangular PPP hypothesis where he raises three points.

1

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3(i)

The first argument of AK is that ‘aspects of its theoretical framework are either implausible, incon-

sistent or incomplete’. This strong statement is based on somewhat perplexed misunderstandings, the

three important assumptions AK assumes we make. The argument seems to be based on incomplete

information too. There are five, instead of three, equations for introducing GT PPP, and equation (3)

is interim to reach equation (5). Our explanation and discussion start below equation (5):

The above relationship tells that inflation in the Euroland would be influenced more by

the inflation of the economies that possess greater gravity and momentum, and by the

changes in the exchange rates between the euro and the currencies that possess greater

gravity and momentum. The influence of small economies is negligible. Similarly, this

notion applies to the US dollar, the RMB and other currencies

(p. 3,075).

While AK interprets:

The first is that small economies have a negligible role to play in the GT PPP relation-

ship. This assumption is plausible in relation to an individual small economy. For exam-

ple, goods produced in Chile account for a tiny share of Euroland's consumption bundle

and so, naturally, inflation in Chile and fluctuations in the value of its peso against the

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© 2021 The Authors. The World Economy published by John Wiley & Sons Ltd