Some remarks on purchasing power parity and exchange rate determination mechanism

Takaaki Aoki

Applied Economics Letters, 2007, vol. 14, issue 3, 179-182

Abstract: This article shows how larger, under a Cournot oligopoly model with international linkage, a long-run equilibrium exchange rate deviates from the purchasing power parity (PPP) in factor prices than the PPP in product prices does, with the asymmetry in the degree of competitiveness, consumer's preference and market volume between countries, or with the asymmetry in the marginal costs between firms, although into the same direction. Our result may well explain the phenomenon of so-called 'overshooting' from a different angle from the existing related literatures.

Date: 2007
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DOI: 10.1080/13504850500425816

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