A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings
Publikation: Working paper › Forskning
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A Resolution of the Purchasing Power Parity Puzzle : Imperfect Knowledge and Long Swings. / Frydman, Roman; Goldberg, Michael D.; Johansen, Søren; Juselius, Katarina.
Department of Economics, University of Copenhagen, 2008.Publikation: Working paper › Forskning
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TY - UNPB
T1 - A Resolution of the Purchasing Power Parity Puzzle
T2 - Imperfect Knowledge and Long Swings
AU - Frydman, Roman
AU - Goldberg, Michael D.
AU - Johansen, Søren
AU - Juselius, Katarina
N1 - JEL classification: F31, F41, G15, G17
PY - 2008
Y1 - 2008
N2 - Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "Purchasing Power Parity puzzle". In this paper, we trace the puzzle to exchange rate modelers' use of the "Rational Expectations Hypothesis". We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates.
AB - Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "Purchasing Power Parity puzzle". In this paper, we trace the puzzle to exchange rate modelers' use of the "Rational Expectations Hypothesis". We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates.
KW - Faculty of Social Sciences
KW - PPP puzzle
KW - rational expectations hypothesis
M3 - Working paper
BT - A Resolution of the Purchasing Power Parity Puzzle
PB - Department of Economics, University of Copenhagen
ER -
ID: 9088654