Dissecting the PPP puzzle : The unconventional roles of nominal exchange rate and price adjustments
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review
Author(s)
Detail(s)
Original language | English |
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Pages (from-to) | 135-150 |
Journal / Publication | Journal of International Economics |
Volume | 64 |
Issue number | 1 |
Publication status | Published - Oct 2004 |
Externally published | Yes |
Link(s)
Abstract
The conventional view, as expounded by sticky-price models, is that price adjustment determines the PPP reversion rate. This study examines the mechanism by which PPP deviations are corrected. Nominal exchange rate adjustment, not price adjustment, is shown to be the key engine governing the speed of PPP convergence. Moreover, nominal exchange rates are found to converge much more slowly than prices. With the reversion being driven primarily by nominal exchange rates, real exchange rates also revert at a slower rate than prices, as identified by the PPP puzzle [J. Econ. Lit. 34 (1996) 647]. © 2003 Elsevier B.V. All rights reserved.
Research Area(s)
- Generalized impulse responses, Half-life, Price adjustment speed, Purchasing power parity
Citation Format(s)
Dissecting the PPP puzzle: The unconventional roles of nominal exchange rate and price adjustments. / Cheung, Yin-Wong; Lai, Kon S.; Bergman, Michael.
In: Journal of International Economics, Vol. 64, No. 1, 10.2004, p. 135-150.
In: Journal of International Economics, Vol. 64, No. 1, 10.2004, p. 135-150.
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review