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Unformatted text preview: remaining constant). On the other hand, it is easy to see that there are high fluctuations in the exchange rates in the short term. The PPP Puzzle is: if the exchange rates are so volatile (i.e. they can change very quickly in the short term), why does it take such a long time for them to converge to the exchange rate predicted by the PPP? The most common explanation is, that monetary shocks to the economy are transmitted quickly to the exchange rates (because of liquid markets in financial instruments where new information has an almost instantaneous effect on asset prices), whereas prices and salaries in the real economy adjust much slower to such monetary shocks ('sticky prices')....
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- Spring '10
- Exchange Rate