Activities per year
Abstract
The purchasing power parity (PPP) puzzle refers to the inability to reconcile the high short-run volatility of exchange rates with the glacial speed at which deviations from parity seem to damp out. Despite this, there is strong evidence of the long-run relationship between exchange rates and international price differentials. More recently, the alternative notion of non-linear mean reversion dynamics of rates is attracting substantial attention: as a consequence of various adjustment costs, there is a sizeable buffer region within which exchange rates can move independently of prices, generating persistent deviations from parity. This study seeks to integrate the idea of this “inaction band” with trade costs. When deviations fall within the band, movements in rates are close to a random walk; but when the threshold of the band is crossed, arbitrage causes movements back toward the band. To test this approach, we use a large number of disaggregated and highly tradable agricultural products over time in a large number of countries. We find some evidence in favour of the approach.
Original language | English |
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Number of pages | 29 |
Specialist publication | SSRN Electronic Journal |
DOIs | |
Publication status | Published - 20 Sept 2017 |
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Dive into the research topics of 'Exchange Rates, Prices and Trade Costs'. Together they form a unique fingerprint.Activities
- 5 Contribution or participation in a conference
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29th Australian and New Zealand Econometric Study Group Meeting
Vo, L. (Participant)
14 Feb 2019 → 15 Feb 2019Activity: Conferences and workshops › Contribution or participation in a conference
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3rd Australasian Commodity Markets Conference
Vo, L. (Participant)
4 Apr 2019 → 5 Apr 2019Activity: Conferences and workshops › Contribution or participation in a conference
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West Australian Agricultural and Resource Economics Conference
Vo, L. (Participant)
26 Sept 2018Activity: Conferences and workshops › Contribution or participation in a conference