In the general discussion that followed the commentaries, the commentators addressed three main points: the reasons for scant empirical support for the theory of purchasing power parity (PPP), the evaluation of effects of exchange-rate volatility on international trade, and the importance of currency substitution for exchange-rate determination.
Several statements were made, both by the authors of papers presented in part 3 and by the commentators, to the effect that in most cases studied the evidence of relationships postulated by the PPP theory was weak. This led a number of participants in the conference to express doubts about the usefulness and applicability of the theory itself. Jacob Frenkel made a distinction, however, between the fact that purchasing power parity appears not to hold and the inference that the theory is not valid. He stated that this fact is not so much a test of the validity of a specific theory of exchange rate determination as it is a reflection of the nature of the shocks that disturbed the world economy in the 1970s. Given the frequency and intensity of real shocks during the past decade, it is not surprising, Frenkel maintained, that PPP relationships failed to hold in either the short run or the long run.
John Bilson expanded Frenkel's argument by pointing out that real shocks generally entail changes in relative prices, and hence deviations from purchasing power parity. Because such relative price changes in the 1970s were large, so also were the deviations from parity relationships. These deviations, for example, accounted for about 30 percent of the inflation differential between West Germany and both the United States and the United Kingdom. Parenthetically, Bilson argued that the observed failure of the PPP theory to hold does not undermine the soundness of monetary models of exchange rate determination because the fundamental idea underlying these models is not the PPP relationship but the idea that the economic system is homogeneous in its monetary magnitudes.