PPP Strikes Back: Aggregation and the Real Exchange Rate / Jean Imbs, Haroon Mumtaz, Morton O. Ravn, Helene Rey.

Format:

Book

Author/Creator:

Imbs, Jean.

Contributor:

Mumtaz, Haroon.

Ravn, Morton O.

Rey, Helene.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9372.

NBER working paper series no. w9372

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

PPP Strikes Back

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

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 corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the puzzle. We also explain why traded goods prices account for the bulk of the persistence and volatility of the real exchange rate. The reason is that traded goods prices display dynamics that are more heterogeneous than non-traded ones.

Notes:

Print version record

December 2002.