With transaction costs for trading goods, the nominal exchange rate moves within a band around the nominal purchasing power parity (PPP) value. We model the behavior of the band and of the exchange rate within the band. The model explains why there are below‐unity slope coefficients in regression tests of PPP, and why these increase toward unity under hyperinflation or with low‐frequency data. Our results are independent of the presence of nontraded goods in the economy.
No takes yet. Share an insight, caveat, or question.
Sercu et al. (1995) studied this question.
Synapse has enriched 5 related papers. Consider them for comparative context: