The Alternative to the Existing System of the Concepts about Purchasing Power Parity Deviations. Derived from the Estonian Experience

Jaanus Raim ()
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Jaanus Raim: Department of Economics at Tallinn University of Technology

No 115, Working Papers from Tallinn School of Economics and Business Administration, Tallinn University of Technology

Abstract: The huge price differences between the former Soviet Union (FSU) and remaining world emerged at the beginning of 1990s. This phenomenon of hundredfold relative purchasing power of foreign currencies in the republics of FSU is not systematically explained by the traditional system of the Purchasing Power Parity (PPP) deviations¥ causes ñ by monetary, real demand side and real supply side shocks. In this context, the paper examines the traditional causes of price differences and derives the improved system of the PPP deviations¥ causes. We show that both the basic causes of PPP deviations are determined by potential investors¥ imagination about the usefulness of the countries¥ assets.

Keywords: price convergence; FSU; PPP; PPP deviations; cheapness; capital-information mismatch; Balassa-Samuelson effect; cost-recovery hypothesis; subjective business climate (search for similar items in EconPapers)
JEL-codes: E1 E3 F2 (search for similar items in EconPapers)
Pages: 15
Date: 2004
Note: Many thanks to the organisations and institutions which supplied data for this study in the context of bright transitional moment. Support from the Estonian Science Foundation (Project 5185) is greatly acknowledged by the author.
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Published in Working Papers in Economics.School of Economics and Business Administration,Tallinn University of Technology (TUTWPE), Pages 185-198

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