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The PPP Puzzle: An Update

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  • Razzak, Weshah

Abstract

We show that the Purchasing Power Parity (PPP) puzzle, whereby the half-life of the shock to the real exchange rate is long and unjustifiable by monetary and financial shocks, is a result of specification and estimation issues. We provide an alternative specification for PPP and show that the half-life of the shock could be as short as 6.8 months and as long as 2 years, which is considerably shorter than what have been reported in the literature.

Suggested Citation

  • Razzak, Weshah, 2017. "The PPP Puzzle: An Update," MPRA Paper 80774, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:80774
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    File URL: https://mpra.ub.uni-muenchen.de/80774/1/MPRA_paper_80774.pdf
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    References listed on IDEAS

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    Keywords

    PPP; unit root; half-life of shocks;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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