Sticky Prices and the Purchasing Power Parity Puzzle

35 Pages Posted: 2 Feb 2004

See all articles by Dimitrios Malliaropulos

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management; National Bank of Greece

Ekaterini Panopoulou

Essex Business School

Theologos Pantelidis

University of Kent

Nikitas Pittis

University of Piraeus - Department of Banking and Financial Management

Date Written: January 14, 2004

Abstract

This paper investigates the Purchasing Power Parity Puzzle in the context of a Vector Autoregressive(VAR) model, where the real exchange rate is Granger caused by macroeconomic variables, suggested by 'sticky-price' theories of exchange rate determination. By doing this, we are able to discern the relative effect of nominal price rigidities on the speed of adjustment of the real exchange rate towards long-run PPP. We first show that the impulse response function of a variable participating in the VAR is not, in general, the same with the impulse response function obtained from the equivalent ARMA representation of this variable, if the latter is Granger caused by other variables in the system. The difference between the two functions captures the effects of the Granger-causing variables on the dynamic adjustment process of the variable of interest. Our empirical results for a set of four currencies suggest that price stickiness accounts for 22% to 50% of the half-life of innovations in the real exchange rate.

Keywords: Real exchange rate, persistence measures, nominal rigidities, VAR, impulse response

JEL Classification: F31, C32

Suggested Citation

Malliaropulos, Dimitrios and Panopoulou, Ekaterini and Pantelidis, Theologos and Pittis, Nikitas, Sticky Prices and the Purchasing Power Parity Puzzle (January 14, 2004). Available at SSRN: https://ssrn.com/abstract=492023 or http://dx.doi.org/10.2139/ssrn.492023

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
(+30) 210 3341527 (Phone)
(+30) 210 3341702 (Fax)

National Bank of Greece ( email )

86 Eolou Str.
10232 Athens
Greece
+30 1 3251133 (Fax)

Ekaterini Panopoulou (Contact Author)

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Theologos Pantelidis

University of Kent ( email )

Canterbury, Kent CT2 7PE
United Kingdom

Nikitas Pittis

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
184
Abstract Views
1,437
rank
185,089
PlumX Metrics