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PPP strikes back: aggregation and the real exchange rate

Imbs, J.; Mumtaz, H.; Ravn, M.O.; Rey, H.; (2005) PPP strikes back: aggregation and the real exchange rate. Quarterly Journal of Economics , 120 (1) pp. 1-43. 10.1162/qjec.2005.120.1.1. Green open access

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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.

Type: Article
Title: PPP strikes back: aggregation and the real exchange rate
Open access status: An open access version is available from UCL Discovery
DOI: 10.1162/qjec.2005.120.1.1
Publisher version: http://dx.doi.org/10.1162/qjec.2005.120.1.1
Language: English
Additional information: © 2005 The MIT Press
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/18615
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