Adjustment Speeds of Nominal Exchange Rates and Prices toward Purchasing Power Parity

Kentaro Iwatsubo, 健太郎 岩壷 and ケンタロウ イワツボ

No 2005-11, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: The conventional view, as expounded by sticky-price models, is that price adjustment determines the PPP reversion rate. Contrary to this, recent studies indicate that nominal exchange rates converge much more slowly to PPP than nominal prices. This paper investigates how adjustment speeds of nominal exchange rates and prices toward PPP are affected by exchange rate regimes by employing a vector error correction model (VECM). We find evidence from 22 OECD countries that the adjustment speed of nominal exchange rates toward PPP is faster than that of prices as nominal exchange rates are relatively stable. This suggests that nominal exchange rate volatility has significant bearings on the variables primarily driving adjustment toward the long-run equilibrium level defined by PPP. We also show that the real exchange rates converge faster to the long-run PPP level for the relatively stable exchange rates, consistent with the evidence to support the significant mean reversion of real exchange rates for the gold standard period.

Keywords: Purchasing power parity; Exchange rate regimes (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2006-01
Note: First draft: September 28, 2005
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13508/wp2005-11a.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2005-11

Access Statistics for this paper

More papers in CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University Contact information at EDIRC.
Bibliographic data for series maintained by Reiko Suzuki ( this e-mail address is bad, please contact ).