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The Law Of One Price, Purchasing Power Parity And Exchange Rates

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  • Pippenger, John

Abstract

Exchange-rate economics is filled with puzzles. The asset approach has failed. Purchasing Power Parity is useful at best in the long run. There is no clear link between exchange rates and fundamentals. With no empirically supported theory for exchange rates, open-economy macro models are built on sand. This paper shows for the first time how recognizing differences between retail, wholesale and auction markets helps solve the puzzles, provides a theory of exchange rates based on auction markets for assets and commodities, and suggests a link between fundamentals and exchange rates.

Suggested Citation

  • Pippenger, John, 2020. "The Law Of One Price, Purchasing Power Parity And Exchange Rates," University of California at Santa Barbara, Economics Working Paper Series qt8x04p85k, Department of Economics, UC Santa Barbara.
    • Handle: RePEc:cdl:ucsbec:qt8x04p85k
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    References listed on IDEAS

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    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    2. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
    3. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    4. Marcus Asplund & Richard Friberg, 2001. "The Law of One Price in Scandinavian Duty-Free Stores," American Economic Review, American Economic Association, vol. 91(4), pages 1072-1083, September.
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    Cited by:

    1. Pippenger, John, 2022. "The Law Of One Price, Borders And Purchasing Power Parity," University of California at Santa Barbara, Economics Working Paper Series qt5b17d1dr, Department of Economics, UC Santa Barbara.

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    More about this item

    Keywords

    Social and Behavioral Sciences; exchange rates; arbitrage; trade; LOP; PPP; transaction costs; retail; wholesale; auction; CIP;
    All these keywords.

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