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The Roles of Nominal Exchange Rate and Relative Price Adjustments in PPP Reversion
- Authors
- Nam, Deok woo
- Issue Date
- Jun-2011
- Publisher
- OHIO STATE UNIV PRESS
- Keywords
- Generalized impulse response; Nonlinear real exchange rate adjustment; Purchasing power parity; Threshold cointegration
- Citation
- JOURNAL OF MONEY CREDIT AND BANKING, v.43, no.4, pp.775 - 785
- Indexed
- SSCI
SCOPUS
- Journal Title
- JOURNAL OF MONEY CREDIT AND BANKING
- Volume
- 43
- Number
- 4
- Start Page
- 775
- End Page
- 785
- ISSN
- 0022-2879
- Abstract
- This paper investigates the roles of the nominal exchange rate and relative prices in restoring purchasing power parity (PPP) by estimating their dynamics with a bivariate threshold vector error correction model. Our empirical results suggest a threshold cointegrating relationship between the nominal exchange rate and relative prices. However, these two variables play different roles in restoring PPP. The nominal exchange rate adjusts to restore PPP only outside the threshold band. Within the band, PPP is restored mainly through adjustments in relative prices.
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Related Researcher
- Nam, Deok woo
- COLLEGE OF ECONOMICS AND FINANCE (SCHOOL OF ECONOMICS & FINANCE)