Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustments
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 (Rogoff, 1996).Download Info
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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 102003.Length: 21 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:hkm:wpaper:102003
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Keywords:Other versions of this item:
- Cheung, Yin-Wong & Lai, Kon S. & Bergman, Michael, 2004. "Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments," Journal of International Economics, Elsevier, vol. 64(1), pages 135-150, October.
- Yin-Wong Cheung & Kon S. Lai & Michael Bergman, 2003. "Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustment," CESifo Working Paper Series 924, CESifo Group Munich.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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