The Roles of Nominal Exchange Rate and Relative Price Adjustments in PPP Reversion

Deokwoo Nam

Journal of Money, Credit and Banking, 2011, vol. 43, issue 4, 775-785

Abstract: This paper investigates the roles of the nominal exchange rate and relative prices in restoring purchasing power parity (PPP) by estimating their dynamics with a bivariate threshold vector error correction model. Our empirical results suggest a threshold cointegrating relationship between the nominal exchange rate and relative prices. However, these two variables play different roles in restoring PPP. The nominal exchange rate adjusts to restore PPP only outside the threshold band. Within the band, PPP is restored mainly through adjustments in relative prices.

Date: 2011
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https://doi.org/10.1111/j.1538-4616.2011.00396.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:43:y:2011:i:4:p:775-785

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