The PPP Puzzle: An Update

Razzak, Weshah (2017): The PPP Puzzle: An Update.

Abstract

We show that the Purchasing Power Parity (PPP) puzzle, whereby the half-life of the shock to the real exchange rate is long and unjustifiable by monetary and financial shocks, is a result of specification and estimation issues. We provide an alternative specification for PPP and show that the half-life of the shock could be as short as 6.8 months and as long as 2 years, which is considerably shorter than what have been reported in the literature.

• Item Type: MPRA Paper
• Language: English
• Keywords: PPP, unit root, half-life of shocks
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C18 - Methodological Issues: General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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