PPP strikes back: Aggregation and the real exchange rate

Jean Imbs, Haroon Mumtaz, Morten O. Ravn, Hélène Rey

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)1-43
Number of pages43
JournalQuarterly Journal of Economics
Volume120
Issue number1
DOIs
StatePublished - Feb 2005

ASJC Scopus subject areas

  • Economics and Econometrics

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