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

Publikation: Working paperForskning

Dokumenter

  • PDF

    Forlagets udgivne version, 315 KB, PDF-dokument

Roman Frydman, Michael D. Goldberg, Søren Johansen, Katarina Juselius

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.
OriginalsprogEngelsk
UdgiverDepartment of Economics, University of Copenhagen
Antal sider37
StatusUdgivet - 2008

Bibliografisk note

JEL classification: F31, F41, G15, G17

Antal downloads er baseret på statistik fra Google Scholar og www.ku.dk


Ingen data tilgængelig

ID: 9088654