This paper employs a new methodology for measuring the contribution of growth and interest rate differentials to the half-life of deviations from Purchasing Power Parity (PPP). Our method is based on directly comparing the impulse response function of a VAR model, where the real exchange rate is...

In this paper we show that standard tests for long-run Purchasing Power Parity (PPP) are misspecified if aggregate prices are sticky. Using Monte Carlo simulations, we show that in small samples the ADF test has low power to reject the null of no cointegration when long-run PPP is tested using...

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...