Quarterly Journal of Economics Vol. 120 No. 1 2005

PPP Strikes Back: Aggregation And the Real Exchange Rate

Jean Imbs^1,2,3,4; Haroon Mumtaz^1,2,5,6; Morten O. Ravn^1,7,5,8; Hélène Rey^1,5

¹ National Bureau of Economic Research · ² Princeton University · ³ London Business School · ⁴ University of Lausanne · ⁵ Centre for Economic Policy Research · ⁶ Bank of England · ⁷ Economic Policy Institute · ⁸ European University Institute

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.

DOI

10.1162/0033553053327524

Volume

120

Issue

1

Pages

1-43

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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