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Sources of Purchasing Power Disparities Between the G3-Economies

  • Weber, Axel A.
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    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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    Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 419.

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    Length: pages
    Date of creation: Nov 1997
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    Handle: RePEc:bon:bonsfb:419
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    Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany

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    7. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
    8. John H. Rogers, 1995. "Real shocks and real exchange rates in really long-term data," International Finance Discussion Papers 493, Board of Governors of the Federal Reserve System (U.S.).
    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.
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    15. Perron, P., 1986. "Trends and Random Walks in Macroeconomic Time Series: Further Evidence From a New Approach," Cahiers de recherche 8650, Universite de Montreal, Departement de sciences economiques.
    16. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
    17. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
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