Persistent deviation of real exchange rates from purchasing power parity (PPP) values is a puzzle, since nominal shocks, which cause such deviation, are expected to have only short-run effects. If some goods are non-traded, Balassa Samuelson (BS) showed how such deviations occur and explain why...

Three open economy puzzles are, first, the price level of an advanced economy (AE) is higher compared to that of an emerging or developing economy (EDE) measured in the same currency. But, second, inflation tends to be much higher in EDEs. Third, there is a persistent deviation of real exchange...