Abstract
This article shows how larger, under a Cournot oligopoly model with international linkage, a long-run equilibrium exchange rate deviates from the purchasing power parity (PPP) in factor prices than the PPP in product prices does, with the asymmetry in the degree of competitiveness, consumer's preference and market volume between countries, or with the asymmetry in the marginal costs between firms, although into the same direction. Our result may well explain the phenomenon of so-called ‘overshooting’ from a different angle from the existing related literatures. 1 This article was originally written as a term paper for a graduate course (SUNY Buffalo) in May 2005.
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