PPP Strikes Back: Aggregation and the Real Exchange Rate
57 Pages Posted: 12 Feb 2003
There are 5 versions of this paper
PPP Strikes Back: Aggregation and the Real Exchange Rate
PPP Strikes Back: Aggregation and the Real Exchange Rate
PPP Strikes Back: Aggregation and the Real Exchange Rate
PPP Strikes Back: Aggregation and the Real Exchange Rate
Date Written: January 2003
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.
Keywords: Real exchange rate persistence, aggregation, parameter heterogeneity, purchasing power parity
JEL Classification: C43, F36, F41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Charles M. Engel and John H. Rogers
-
Perspectives on PPP and Long-Run Real Exchange Rates
By Kenneth Froot and Kenneth Rogoff
-
A Panel Project on Purchasing Power Parity: Mean Reversion within and between Countries
-
Purchasing Power Parity in the Long Run
By Niso Abuaf and Philippe Jorion
-
Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations
By David C. Parsley and Shang-jin Wei
-
Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography
By David C. Parsley and Shang-jin Wei