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Sources of Purchasing Power Disparities Between the G3-Economies

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Author Info
Weber, Axel A.
Abstract

Recent theoretical and empirical research in international macroeconomics has rediscovered the problem of purchasing power parity (PPP). Empirically, PPP is a bad approximation of both the short-term and medium-term properties of the data. Economists have had difficulties in explaining the persistent misalignments of real exchange rates, but new empirical research by Clarida and Galí (1995) suggests that much of these real exchange rate movements are due to relative demand shocks. The present paper challenges this view by using an extended version of their structural vector autoregressive (SVAR) model in order to identify a larger number of real shocks (labour supply, productivity and aggregate demand) and nominal shocks (money demand and money supply). It is found that whilst some of their results go through in our extended framework, there is serious doubt with respect to the appropriateness of labelling those shocks which drive real exchange rates as aggregate demand disturbances.

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File URL: ftp://web.bgse.uni-bonn.de/pub/RePEc/bon/bonsfb/bonsfb419.pdf
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Publisher Info
Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 419.

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Date of creation: Nov 1997
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Handle: RePEc:bon:bonsfb:419

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de/index.php?id=517

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Related research
Keywords: purchasing power parity real exchange rates shocks structural vector autoregression impulse response functions variance decompositions

Find related papers by JEL classification:
F3 - International Economics - - International Finance

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References listed on IDEAS
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    Other versions:
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    Other versions:
  9. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carsten Detken & Alistair Dieppe & Jerome Henry & Frank Smets & Carmen Marin, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 160, European Central Bank. [Downloadable!]
  2. Selahattin Dibooglu & Faik Koray, 2001. "The Behavior of the Real Exchange Rate Under Fixed and Floating Exchange Rate Regimes," Open Economies Review, Springer, vol. 12(2), pages 123-143, April. [Downloadable!] (restricted)
  3. Jonathan Haskel & Holger Wolf, 2001. "The Law of One Price -- A Case Study," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  4. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2008. "Fiscal Shocks and Real Exchange Rate Dynamics: Some Evidence for Latin America," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  5. Ronald MacDonald, 2000. "The role of the exchange rate in economic growth: a euro-zone perspective," Research series 200005-5, National Bank of Belgium. [Downloadable!]
  6. Jaanus Raim, 2004. "The Alternative to the Existing System of the Concepts about Purchasing Power Parity Deviations . Derived from the Estonian Experience," Working Papers 115, School of Economics and Business Administration, Tallinn University of Technology. [Downloadable!]
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