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Journal Article
How exchange rates are determined
Journal Article
International output comparisons
Journal Article
How good is PPP?
Journal Article
Understanding trends in foreign exchange rates
Journal Article
Britain's borrowed time
Journal Article
The growing significance of purchasing power parity
The principle of purchasing power parity is central to the theoretical underpinnings of the analysis of many trade issues, but up until recently, there was little evidence that PPP held in the long run. Current research has changed that. The key to finding the evidence was realizing how to test for a long-run effect given the fact that exchange rates adjust to their long-run levels in a nonlinear way.
Working Paper
Purchasing power parity: three stakes through the heart of the unit root null
We provide a comprehensive analysis of the purchasing power parity hypothesis, relying on a linear panel data framework. First, we consider two panel unit root tests, based on transformations of country-specific statistics, which allow for parameter heterogeneity across countries. Using GLS techniques, we modify the two tests to eliminate the upward size distortion induced by cross-sectional dependence among contemporaneous real exchange rate innovations. Second, we consider two tests based on a fixed-effects specification: these tests allow for cross-sectional dependence but impose parameter ...
Working Paper
Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias
International spillovers and exchange rate dynamics are examined in a two-country dynamic optimizing model that allows for home-product bias in consumption patterns: at given relative prices the ratio of home goods consumed to foreign goods consumed is higher in the home country. The setup nests Obstfeld and Rogoff (1995), who assume identical tastes. With home bias, results are different in three ways. When preferences are biased, the wealth transfers associated with current account imbalances induce movements in the real exchange rate and produce large short-run and small long-run ...
Working Paper
Deviations from purchasing power parity: causes and welfare costs
We explore deviations from short-run purchasing power parity across European cities, attempting to move beyond a "first-generation" of papers that document very large border effects. We document two very distinct types of border effects embedded in relative prices. The first is a "real barriers effect," caused by various barriers to market integration. The second is a sticky-consumer-price cum volatile exchange-rate effect. Both are shown to be important empirically, the second type especially so. We argue that the two effects are very different from each other. For the first type of effect, ...
Working Paper
PPP rules, macroeconomic (In)stability and learning
Governments in emerging economies have pursued real exchange rate targeting through Purchasing Power Parity (PPP) rules that link the nominal depreciation rate to either the deviation of the real exchange rate from its long run level or to the difference between the domestic and the foreign CPI-inflation rates. In this paper we disentangle the conditions under which these rules may lead to endogenous fluctuations due to self-fulfilling expectations in a small open economy that faces nominal rigidities. We find that besides the specification of the rule, structural parameters such as the share ...