Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustments

Social Science Research Network, 2004

143 citations recorded by the source corpus.

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).

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/9c39c76831190d8743b31f154b52c903a9d587e1

Citations in the corpus

• Heterogeneity of agents, transactions costs and the exchange rate (2005, unknown): “15 Cheung et al. (2001) have provided evidence indicating that the slow speed of adjustment towards PPP”
• The Emerging Market Crisis and Stock Market Linkages: Further Evidence (2006, unknown): “( Cheung, Lai and Bergman, 2004; Griffin, Nardari and Stulz, 2004), to our knowledge, this is”