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A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

Publikation: Working paper/Preprint Working paperForskning


  • Rp09 01

    Forlagets udgivne version, 385 KB, PDF-dokument

  • Roman Frydman, New York University, USA
  • Michael D. Goldberg, University of New Hampshire, USA
  • Søren Johansen
  • Katarina Juselius, Københavns Universitet, Danmark
  • Institut for Økonomi
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.
Antal sider40
StatusUdgivet - 2009

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