On the purchasing power parity puzzle

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

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Original languageEnglish
Pages (from-to)321-330
Journal / PublicationJournal of International Economics
Issue number2
Publication statusPublished - 2000
Externally publishedYes


A puzzle concerning purchasing power parity is examined: Although the immense exchange rate volatility suggests a likely major role of nominal shocks under sticky prices, the observed half-life persistence of the real exchange rate seems excessively high to be rationalized by price stickiness. This study analyzes carefully the adjustment dynamics of real exchange rates through impulse response analysis. Half-life estimates are found to have substantial imprecision. Moreover, the dynamic response pattern suggests that the shock response is initially amplified before dissipating and that such non-monotonic dynamics can contribute to more than one-third of the observed persistence of real exchange rates. (C) 2000 Elsevier Science B.V. All rights reserved.

Research Area(s)

  • Half-life persistence, Non-monotonic mean reversion, Real exchange rate, Shock amplification