Three contributions to exchange rate economics (project)

Inhalt der Seite

Three contributions to exchange rate economics

Client/Funding Institution

Anniversary Fund of the Oesterreichische Nationalbank

Abstract

The project constructively contributes to the literature on some well-known puzzles in international economics. Part 1 offers a demand-side alternative to the Balassa-Samuelson Effect which is commonly invoked to explain the presence of exchange rate/purchasing power parities gaps. The alternative is tested against the recent ECP data. The same set of data underlies Part 2, concerned with specification of neoclassical general equilibrium models of pan-European trade. Analyses of the models’ solutions shows that the ER-PPP gaps can persist even if the "Law of One Price" operates perfectly. Part 3 studies the ECP data with the means of advanced dynamic econometrics to test hypotheses on movements of relative price and GDP levels across Europe. It is hypothesised that these movements are not disconnected. Part 3 has important implications for the policy (e.g. on euro adoption) debates.