PPP Strikes Back: Aggregation and the Real Exchange Rate

Morten Ravn, Helene Rey, Jean Imbs and Haroon Mumtaz

No 3715, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: C43 F36 F41 (search for similar items in EconPapers)
Date: 2003-01
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: PPP Strikes Back: Aggregation And the Real Exchange Rate (2005)
Working Paper: PPP Strikes Back: Aggregation and the Real Exchange Rate (2005)
Working Paper: PPP Strikes Back: Aggregation and the Real Exchange Rate (2003)
Working Paper: PPP Strikes Back: Aggregation and the Real Exchange Rate (2003)
Working Paper: PPP Strikes Back: Aggregation and the Real Exchange Rate (2002)
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