Authors: Carvalho, Carlos; Nechio, Fernanda

Source: The American Economic Review, Volume 101, Number 6, October 2011 , pp. 2391-2424(34)

Publisher: American Economic Association

Abstract:

We study the purchasing power parity (PPP) puzzle in a multisector, two-country, sticky-price model. Sectors differ in the extent of price stickiness, leading to heterogeneous sectoral real exchange rate dynamics. Deviations from PPP are more volatile and persistent than in an otherwise identical one-sector world economy with the same average frequency of price changes. Under the empirical distribution of price stickiness of the US economy, the model produces PPP deviations with a half-life of 39 months. We provide a structural interpretation of the approaches found in the empirical literature on aggregation and PPP, and reconcile its apparently conflicting findings.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/aer.101.6.2391

Publication date: 2011-10-01

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• The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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