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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
We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics. Established time series and panel methods fail to control for this. Using Eurostat data, we find that when heterogeneity is taken into account, the estimated persistence of real exchange rates falls dramatically. Its half-life, for instance, may fall to as low as eleven months, significantly below the “consensus view” of three to five years
0033-5533
1-43
Imbs, Jean
413e379b-2eb8-4821-b7c7-88789d58f605
Mumtaz, Haroon
6ab5d4f7-076e-4731-ac01-62fac140649d
Ravn, Morten O.
ed259e8b-96c8-48b4-8a82-35df1c541414
Rey, Hélène
e4b07f1f-41a2-4883-90e5-0b1280ded398
Imbs, Jean
413e379b-2eb8-4821-b7c7-88789d58f605
Mumtaz, Haroon
6ab5d4f7-076e-4731-ac01-62fac140649d
Ravn, Morten O.
ed259e8b-96c8-48b4-8a82-35df1c541414
Rey, Hélène
e4b07f1f-41a2-4883-90e5-0b1280ded398

Imbs, Jean, Mumtaz, Haroon, Ravn, Morten O. and Rey, Hélène (2005) PPP strikes back: aggregation and the real exchange rate. Quarterly Journal of Economics, 120 (1), 1-43. (doi:10.1162/qjec.2005.120.1.1).

Record type: Article

Abstract

We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics. Established time series and panel methods fail to control for this. Using Eurostat data, we find that when heterogeneity is taken into account, the estimated persistence of real exchange rates falls dramatically. Its half-life, for instance, may fall to as low as eleven months, significantly below the “consensus view” of three to five years

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Published date: February 2005

Identifiers

Local EPrints ID: 47649
URI: http://eprints.soton.ac.uk/id/eprint/47649
ISSN: 0033-5533
PURE UUID: 5bc50872-8ceb-4665-85b5-a26b799bfd7c

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Date deposited: 07 Aug 2007
Last modified: 15 Mar 2024 09:34

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Contributors

Author: Jean Imbs
Author: Haroon Mumtaz
Author: Morten O. Ravn
Author: Hélène Rey

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