The more commonly used version of PPP is called “relative purchasing power parity,” which emphasises the relationship between changes in the price level or inflation and changes in exchange rates. A country having relatively higher inflation over successive years should experience currency depreciation, but for market frictions.
Empirically, however, relative PPP may not hold in the short-run, because of capital flows, and asymmetric adjustment of goods and asset markets to both monetary and real shocks, leading to either overshooting or undershooting of exchange rates. REER, which is an indicator of the extent of deviation of the exchange rate from PPP at any point of time, therefore, should have a medium-term perspective.