On the purchasing power parity puzzle

  title={On the purchasing power parity puzzle},
  author={Yin-wong Cheung and Kon S. Lai},
A puzzle concerning purchasing power parity is examined: Although the immense exchange rate volatility suggests a likely major role of nominal shocks under sticky prices, the observed half-life persistence of the real exchange rate seems excessively high to be rationalized by price stickiness. This study analyzes carefully the adjustment dynamics of real exchange rates through impulse response analysis. Half-life estimates are found to have substantial imprecision. Moreover, the dynamic… CONTINUE READING
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