The 'Real' Explanation of the PPP Puzzle / Nicholas Ford, Charles Yuji Horioka.

Format:

Book

Author/Creator:

Ford, Nicholas.

Contributor:

National Bureau of Economic Research.

Horioka, Charles Yuji.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22198.

NBER working paper series no. w22198

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalisation across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalisation across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high saving-investment correlations, and prevent real interest rates from being equalised across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from PPP (purchasing power parity) for extended periods of time and can therefore also explain the PPP puzzle. Thus, we are able to resolve 2 of Obstfeld and Rogoff's (2000) "6 major puzzles in macroeconomics" with essentially the same explanation.

Notes:

Print version record

April 2016.