Abstract

http://ssrn.com/abstract=354780
 
 

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PPP Strikes Back: Aggregation and the Real Exchange Rate


Jean M. Imbs


Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Haroon Mumtaz


University of London - Faculty of Social Sciences

Morten O. Ravn


European University Institute - Economics Department (ECO); London Business School - Department of Economics; University of Southampton; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Helene Rey


London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

December 2002


Abstract:     
We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that established time series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices. When heterogeneity is properly taken into account, estimates of the real exchange rate half-life fall dramatically, to little more than one year, or significantly below Rogoff's "consensus view" of three to five years. We show that corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the PPP puzzle.

Number of Pages in PDF File: 55

Keywords: Real Exchange Rate Persistence, Purchasing Power Parity, Aggregation, Parameter Heterogeneity

JEL Classification: F36, F41, C43

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Date posted: March 13, 2003  

Suggested Citation

Imbs, Jean M. and Mumtaz, Haroon and Ravn, Morten O. and Rey, Helene, PPP Strikes Back: Aggregation and the Real Exchange Rate (December 2002). Available at SSRN: http://ssrn.com/abstract=354780 or http://dx.doi.org/10.2139/ssrn.354780

Contact Information

Jean M. Imbs
Paris School of Economics (PSE) ( email )
48 Boulevard Jourdan
Paris, 75014 75014
France
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Haroon Mumtaz
University of London - Faculty of Social Sciences ( email )
United Kingdom
Morten O. Ravn (Contact Author)
European University Institute - Economics Department (ECO) ( email )
Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy
London Business School - Department of Economics ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 ext. 3717 (Phone)
+44 20 7402 0718 (Fax)
University of Southampton ( email )
University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom
+44 1703 593996 (Phone)
+44 1703 593858 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Helene Rey
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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