@article{75e25d518a87498da5ae669f03dd64c7,
title = "PPP strikes back: Aggregation and the real exchange rate",
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.",
author = "Jean Imbs and Haroon Mumtaz and Ravn, {Morten O.} and H{\'e}l{\`e}ne Rey",
note = "Funding Information: * We thank the editor, two referees, P{\'o}l Antras, Michael Devereux, Charles Engel, Martin Evans, Lutz Kilian, M. Hashem Pesaran, Richard Portes, Roberto Rigobon, Kenneth Rogoff, Barbara Rossi, Christopher Sims, Ron Smith, Antonio Spilimbergo, Shang-Jin Wei, Michael Woodford, Charles Wyplosz, and participants at numerous conferences and seminars for helpful comments. Parts of this paper were completed while Ravn was a visitor at the University of Pennsylvania, and Imbs and Rey were visitors at the International Monetary Fund. The authors are grateful to these institutions for their hospitality. The paper is part of the project “Exchange Rates, International Relative Prices, and Macroeconomic Models,” funded by the ESRC (grant No. L138 25 1043), and of the RTN programme “The Analysis of International Capital Markets: Understanding Europe{\textquoteright}s Role in the Global Economy,” funded by the European Commission (contract No. HPRN-CT-1999-00067). This paper does not represent the views of the Bank of England or of Monetary Policy Committee members. The work was done while the second author was at the London Business School.",
year = "2005",
month = feb,
doi = "10.1162/0033553053327524",
language = "English (US)",
volume = "120",
pages = "1--43",
journal = "Quarterly Journal of Economics",
issn = "0033-5533",
publisher = "Oxford University Press",
number = "1",
}