The Purchasing Power Parity Puzzle and Imperfect Knowledge The Case of the Polish Zloty

Abstract

A review of the contemporary mainstream literature on exchange rate
modelling clearly indicates that the rational expectations hypothesis (RE) is
almost invariably taken as a point of reference in empirical investigations. This
paper tests the RE hypothesis for the Polish foreign exchange market within the
Roman Frydman and Michael Goldberg model that builds on the hypothesis
of imperfect knowledge economics (IKE). The employed modelling strategy
consists in the formulation of assumptions about the persistence of nominal
rate, prices and interest rates and of the verification of competing scenarios
congruent with RE and IKE. As a result of the analysis, the RE hypothesis is
rejected in favour of the IKE alternative.