The Exchange Rate in the Presence of Transactions Costs: Implications for Tests of Purchasing Power Parity
JOURNAL OF FINANCE, Vol 50 No 4, September 1995
Posted: 15 Jul 1998
Abstract
With transactions costs for trading goods, the nominal exchange rate moves within a band around the nominal 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 towards unity under hyperinflation or with low-frequency data. Our results are independent of the presence of non-traded goods in the economy.
JEL Classification: F30
Suggested Citation: Suggested Citation
Sercu, Piet M. F. A. and Van Hulle, Cynthia and Uppal, Raman, The Exchange Rate in the Presence of Transactions Costs: Implications for Tests of Purchasing Power Parity. JOURNAL OF FINANCE, Vol 50 No 4, September 1995, Available at SSRN: https://ssrn.com/abstract=6617
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