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The Micro-Macro Disconnect of Purchasing Power Parity

Paul Bergin, Reuven Glick () and Jyh-Lin Wu

No 15624, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Panel estimation of an error correction model using a micro data set uncovers new stylized facts regarding this puzzle. First, adjustment to purchasing power parity deviations in aggregated data is not just a slower version of adjustment to the law of one price in microeconomic data, as arbitrage occurs in different markets, in response to distinct macroeconomic and microeconomic shocks. Second, when half-lives are estimated conditional on macro shocks, micro relative prices exhibit just as much persistence as aggregate real exchange rates. These results challenge theories of real exchange rate persistence based on sticky prices and on heterogeneity across goods, and support an explanation based on the presence of distinct macro and microeconomic shocks.

JEL-codes: F4 (search for similar items in EconPapers)
Date: 2009-12
Note: IFM
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Published as Paul R. Bergin & Reuven Glick & Jyh-Lin Wu, 2013. "The Micro-Macro Disconnect of Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 798-812, July.

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Related works:
Journal Article: The Micro-Macro Disconnect of Purchasing Power Parity (2013) Downloads
Working Paper: The micro-macro disconnect of purchasing power parity (2010) Downloads
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