A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates

David Parsley and Shang-Jin Wei

Economic Journal, 2007, vol. 117, issue 523, 1336-1356

Abstract: We match Big Mac prices with prices of its ingredients as a unique prism to study real exchange rates (RERs). This approach has several advantages. First, the "levels" of the Big Mac RER can be measured meaningfully. Second, as the "exact" composition of a Big Mac is known, the contributions of its tradable and non-tradable components can be estimated relatively precisely. Third, the dynamics of the RER can be studied in a setting free of several biases inherent in CPI-based RERs. Finally, a large cross-country dimension allows us to overturn the Engel result on what drives RERs. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

Date: 2007
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Working Paper: A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates (2004)
Working Paper: A Prism into the PPP Puzzles: The Micro-foundations of Big Mac Real Exchange Rates (2003)
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