Does Long-run Purchasing-power Parity Hold within the European Monetary System?

Some recent research has reported results more favourable to long-run purchasing-power parity (PPP) for exchange rates within the European Monetary System (EMS) than for those outside it. This is inconsistent with the predictions of theories that regard the EMS as a means of acquiring anti-inflation credibility for the governments of relatively high-inflation countries. Results of tests on a wide range of intra-EMS exchange rates suggest a tendency to under-adjust for cumulative price differentials, and that the DM-FF rate is atypical in its adherence to long-run PPP.