what is purchasing power parity (PPP)? discuss how theory diverges from findings of empirical studies and...

what is purchasing power parity (PPP)? discuss how theory diverges from findings of empirical studies and why does it happens? you should use an appropriate theoretical model to explain the "over-shooting" behaviour of exchange rates in the short run. Discuss the main features of this model and its appropriateness in explaining "over-shooting" behaviour.

Expert Solution

Dornbusch's model explain about the exchange rate overshooting.

- Change in Stock is driven by a short run higher change in flow.

- Prices are sticky exchange overshoot their long run.

- The intial depreciation of the exchange rate must be larger than long run depreciation.

Rahul Sunny answered 2 years ago

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