The Micro-Macro Disconnect of Purchasing Power Parity

Paul Bergin, Reuven Glick and Jyh-Lin Wu
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Jyh-Lin Wu: National Sun Yat-Sen University

The Review of Economics and Statistics, 2013, vol. 95, issue 3, 798-812

Abstract: This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Error correction model estimates indicate that a different mix of shocks drives international price deviations at the microeconomic level and that dynamic adjustment works through arbitrage in the goods market rather than the foreign exchange market. When half-lives are estimated conditional on a common set of estimated macro shocks, we find that micro relative prices exhibit every bit as much persistence as aggregate real exchange rates. These results challenge theories of real exchange rate persistence based on sticky prices and heterogeneity across goods. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords: exchange rates; prices (search for similar items in EconPapers)
JEL-codes: F00 F15 F31 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (21)

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Related works:
Working Paper: The micro-macro disconnect of purchasing power parity (2010)
Working Paper: The Micro-Macro Disconnect of Purchasing Power Parity (2009)
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