Productivity Bias Hypothesis and The Purchasing Power Parity: a review article

Productivity differentials among countries are said to be one of the major sources that contribute to the deviation of the Purchasing Power Parity-based exchange rate from the equilibrium rate, hence the productivity bias hypothesis. Prior to last review article on the productivity bias hypothesis in 1976, almost all studies relied upon cross-sectional regression analysis. Since then, two groups of empirical studies have emerged. While one group has employed time-series data, the other one has used panel data. These two later groups have provided more support to the hypothesis than the earlier cross-sectional studies. This paper reviews and criticizes each group separately and provides tables that summarize main features of each study. Copyright Blackwell Publishers Ltd, 2005.