American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Aggregation and the PPP Puzzle in a Sticky-Price Model
American Economic Review
vol. 101,
no. 6, October 2011
(pp. 2391–2424)
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. (JEL F31, G31)Citation
Carvalho, Carlos, and Fernanda Nechio. 2011. "Aggregation and the PPP Puzzle in a Sticky-Price Model." American Economic Review, 101 (6): 2391–2424. DOI: 10.1257/aer.101.6.2391Additional Materials
JEL Classification
- F31 Foreign Exchange
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity