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

Yin-Wong Cheung, Kon S. Lai and Michael Bergman
Additional contact information
Kon S. Lai: California State University, Los Angeles
Michael Bergman: Lund University

No 102003, Working Papers from Hong Kong Institute for Monetary Research

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 (Rogoff, 1996).

JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2003-05
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments (2004)
Working Paper: Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustment (2003)
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