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Discrepancies between Purchasing Power Parities and Exchange Rates under the Law of One Price: A Puzzle (partly) Explained?

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  • Leon Podkaminer

    ()
    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

European Comparison Project data (years 1999-2008) are used for an estimation of cross-country systems (AIDS) of consumer demand functions defined over durable and non-durable tradable goods and non-tradable services. General exchange equilibrium models of inter-EU trade generate equalized relative prices of tradable goods. But domestic relative prices of services become more dispersed and can move the PPP/ER ratios away from unity. PPP/ER discrepancies may be sustained even when there are no impediments to free trade.

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Bibliographic Info

Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Working Papers with number 69.

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Length: 18 pages including 5 Tables
Date of creation: Sep 2010
Date of revision:
Publication status: Published as wiiw Working Paper
Handle: RePEc:wii:wpaper:69

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Keywords: Purchasing Power Parity; exchange rate; PPP/ER discrepancy; Law of One Price; Balassa-Samuelson Effect; trade integration; computable general equilibrium; cross-country systems of demand functions; Almost Ideal Demand System; tradable goods; non-tradable goods;

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  1. Jose De Gregorio & Alberto Giovannini & Holger C. Wolf, 1993. "International Evidence on Tradables and Nontradables Inflation," Working Papers 93-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Joanna Wolszczak-Derlacz & Rembert De Blander, 2009. "Price convergence in the European Union and in the New Member States," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 40(2), pages 37-59.
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