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Modelling Departures from Purchasing Power Parity

  • Ronald MacDonald
  • Ian Marsh
Part of the Advanced Studies in Theoretical and Applied Econometrics book series (ASTA, volume 37)

Abstract

In this chapter we move away from the long-run exchange rate framework provided by PPP and the monetary model to a more eclectic exchange rate model, which combines both real and nominal factors. In particular, we have seen from our discussion of the recent literature on PPP that it takes about eight years for a deviation from PPP to be extinguished. As we noted in chapter 3, part of the explanation for this slow mean reversion might lie in the existence of transportation costs which introduce non-linear thresholds. An alternative explanation is that there may be real factors which introduce systematic variability into the behaviour of real and nominal exchange rates and in this chapter we examine some recent work which seeks to model this systematic variability.

Keywords

Exchange Rate Real Exchange Rate Real Interest Rate Demand Shock Nominal Exchange Rate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media Dordrecht 1999

Authors and Affiliations

  • Ronald MacDonald
    • 1
  • Ian Marsh
    • 2
  1. 1.University of StrathclydeUK
  2. 2.City University Business SchoolUK

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