Deviations from purchasing power parity in efficient markets are often attributed to time-varying risk premiums. Some models have also identified the risk premiums to be the expected real interest rate differentials. This paper shows that risk premiums generally are not equal to ex ante real rate differentials. Empirically, the author finds risk premiums to be better than ex ante real rate differentials in accounting for deviations from purchasing power parity. In addition, both the risk premiums and the deviations from purchasing power parity respond proportionately to a single common factor. Copyright 1990 by Ohio State University Press.