Question

What is the PPP (purchasing power parity )puzzle?

Answer 1

The 'purchasing power parity puzzle’ is the name of the book written by economist Kenneth Roggof. In simple words, the purchasing power parity puzzle refers to the difficulty of reconciliation of a highly volatile short-term real exchange rates with a very slow rate of mean reversion.

Many economists are of the opinion that the long-term exchange rate is driven by purchasing power parity (PPP). However, various practical models have demonstrated that these two rates converge at a very slow rate. This is the purchasing power parity puzzle.