Uncertainty in Currency Mispricing

Kenneth Clements, Yihui Lan and Jiawei Si
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Yihui Lan: Business School, University of Western Australia

No 16-03, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: Declaring a currency to be mispriced is fraught with uncertainties. In this paper, these uncertainties are explicitly recognised in a model of pricing a homogeneous commodity around the world. This allows for a common driver of prices, due to a base-currency effect, and country-specific factors that lead to departures from absolute purchasing power parity on account of income differences, local taxes and charges, etc. This approach leads to estimates of currency mispricing whose significance can be tested in the usual way. Using Big Mac prices, we show that the approach has advantages over the popular Big Mac Index to currency valuation.

Pages: 62 pages
Date: 2016
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Uncertainty in currency mispricing (2018)
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