The Factor Specificity and the Exchange Rate Theory of Purchasing Power Parity: An Extension of the Jones-Purvis Model

The focus of this paper is on the structural aspects of exchange rate determi - nation, generalizing the 1983 Jones-Purvis model. Specifically the Jones-Purvis model is extend to incorporate the concept of factor specificity. It is shown that deviations from purchasing power parity depend on, among other determi - nants, factor specificity. Furt h e rm o re, it examines the factor specificity as a short-medium run determinant of the behavior of exchange rates, in a frame - work where two countries are affected by a common external shock.