Handbook of Exchange Rates

7.8 Acknowledgments

This research was funded by the Norwegian Ministry of Finance, Asset Management Department. The authors are grateful to Øystein Børsum, Jerry Coakley, Tom Fearnley, and Lawrence Officer for useful discussions. The authors alone are responsible for any errors that may remain.

¹For example, if the real exchange rate is highly persistent then the shocks are likely to be real-side, for example, technology shocks, whereas if it is not very persistent then the shocks must be mainly to aggregate demand, such as monetary policy shocks (Rogoff, 1996).

²It is also worth noting that the literature refers to the difficulty sometimes encountered in establishing very strong evidence in favor of PPP as the “PPP puzzle” (Rogoff, 1996). This terminology suggests that, should PPP not hold, it would be regarded as an anomaly, a surprising empirical fact, given that international economists tend to believe that some sort of PPP must guide the long-run comovement between exchange rates and relative prices.

³In practice, it is more common for national statistical bureaus to use arithmetic rather than geometric price indices, although deviations from PPP arising from this source are not likely to be large.

⁴Similarly, Giovannini (1988) uses data on domestic and dollar export prices of Japanese goods and provides evidence that deviations from the LOP—found to be large not only for sophisticated manufacturing goods but also for commodities such as screws, nuts, and bolts—are mainly ...