Title: The Harrod-Balassa-Samuelson hypothesis
Description: "Frictionless, perfectly competitive traded-goods markets justify thinking of purchasing power parity (PPP) as the main driver of exchange rates in the long-run.  But differences in the traded/non-traded sectors of economies tend to be persistent and affect movements in local price levels in ways that upset the PPP balance (the underpinning of the Harrod-Balassa-Samuelson hypothesis, HBS).  This paper uses panel-data techniques on a broad collection of countries to investigate the long-run properties of the PPP/HBS equilibrium using novel local projection methods for cointegrated systems.  These semi-parametric methods isolate the long-run behavior of the data from contaminating factors such as frictions not explicitly modelled and thought to have effects only in the short-run.  Absent the short-run effects, we find that the estimated speed of reversion to long-run equilibrium is much higher.  In addition, the HBS effects means that the real exchange rate is converging not to a steady mean, but to a slowly to a moving target.  The common failure to properly model this effect also biases the estimated speed of reversion downwards.  Thus, the so-called "PPP puzzle" is not as bad as we thought"--National Bureau of Economic Research web site.