Department of Economics and Business Economics

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

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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.

Aarhus, 2009.

Research output: Working paperResearch

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Frydman, Roman ; Goldberg, Michael D. ; Johansen, Søren ; Juselius, Katarina. / A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings. Aarhus, 2009.

Bibtex

@techreport{347376a0e0a911dd8fc3000ea68e967b,
title = "A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings",
abstract = "Asset prices undergo long swings that revolve around benchmarklevels. In currency markets, fluctuations involve real exchange ratesthat are highly persistent and that move in near-parallel fashion withnominal rates. The inability to explain these two regularities withone model has been called the {"}purchasing power parity puzzle.{"} Inthis paper, we trace the puzzle to exchange rate modelers' use of the{"}Rational Expectations Hypothesis.{"} We show that once imperfectknowledge is recognized, a monetary model is able to account for thepuzzle, as well as other salient features of the data, including thelong-swings behavior of exchange rates.",
keywords = "PPP puzzle, long swings, imperfect knowledge, rational expectations hypothesis",
author = "Roman Frydman and Goldberg, {Michael D.} and S{\o}ren Johansen and Katarina Juselius",
year = "2009",
language = "English",
type = "WorkingPaper",

}

RIS

TY - UNPB

T1 - A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

AU - Frydman, Roman

AU - Goldberg, Michael D.

AU - Johansen, Søren

AU - Juselius, Katarina

PY - 2009

Y1 - 2009

N2 - Asset prices undergo long swings that revolve around benchmarklevels. In currency markets, fluctuations involve real exchange ratesthat are highly persistent and that move in near-parallel fashion withnominal rates. The inability to explain these two regularities withone model has been called the "purchasing power parity puzzle." Inthis paper, we trace the puzzle to exchange rate modelers' use of the"Rational Expectations Hypothesis." We show that once imperfectknowledge is recognized, a monetary model is able to account for thepuzzle, as well as other salient features of the data, including thelong-swings behavior of exchange rates.

AB - Asset prices undergo long swings that revolve around benchmarklevels. In currency markets, fluctuations involve real exchange ratesthat are highly persistent and that move in near-parallel fashion withnominal rates. The inability to explain these two regularities withone model has been called the "purchasing power parity puzzle." Inthis paper, we trace the puzzle to exchange rate modelers' use of the"Rational Expectations Hypothesis." We show that once imperfectknowledge is recognized, a monetary model is able to account for thepuzzle, as well as other salient features of the data, including thelong-swings behavior of exchange rates.

KW - PPP puzzle, long swings, imperfect knowledge, rational expectations hypothesis

M3 - Working paper

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

CY - Aarhus

ER -