PPP Strikes Back: Aggregation and the Real Exchange Rate

Jean Imbs, Haroon Mumtaz, Morten Ravn and Helene Rey
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Haroon Mumtaz: Bank of England - Bank of England

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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.

Keywords: Real Exchange Rate Persistence; Purchasing Power Parity; Parameter Heterogeneity (search for similar items in EconPapers)
Date: 2005-02
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Published in Quarterly Journal of Economics, 2005, 120 (1), pp.1-43. ⟨10.1162/0033553053327524⟩

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Journal Article: 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 (2003)
Working Paper: PPP Strikes Back: Aggregation and the Real Exchange Rate (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00612581

DOI: 10.1162/0033553053327524

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