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Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments

Cheung, YW; Lai, KS and Bergman, Michael LU (2004) In Journal of International Economics 64(1). p.135-150
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 [J. Econ. Lit. 34 (1996) 647]. (C) 2003 Elsevier B.V. All rights reserved.
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
purchasing power parity, half-life, impulse responses, generalized, price adjustment speed
in
Journal of International Economics
volume
64
issue
1
pages
135 - 150
publisher
Elsevier
external identifiers
  • wos:000223931100006
  • scopus:12144256714
ISSN
1873-0353
DOI
10.1016/S0022-1996(03)00076-X
language
English
LU publication?
yes
id
1d7491e1-097f-4531-9d7b-86e03e19b2db (old id 898406)
date added to LUP
2008-01-10 13:38:05
date last changed
2017-05-21 03:35:10
@article{1d7491e1-097f-4531-9d7b-86e03e19b2db,
  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 [J. Econ. Lit. 34 (1996) 647]. (C) 2003 Elsevier B.V. All rights reserved.},
  author       = {Cheung, YW and Lai, KS and Bergman, Michael},
  issn         = {1873-0353},
  keyword      = {purchasing power parity,half-life,impulse responses,generalized,price adjustment speed},
  language     = {eng},
  number       = {1},
  pages        = {135--150},
  publisher    = {Elsevier},
  series       = {Journal of International Economics},
  title        = {Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments},
  url          = {http://dx.doi.org/10.1016/S0022-1996(03)00076-X},
  volume       = {64},
  year         = {2004},
}