Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108055
Authors: 
Imbs, Jean
Mumtaz, Haroon
Ravn, Morten O.
Rey, Helene
Year of Publication: 
2003
Series/Report no.: 
IEHAS Discussion Papers MT-DP - 2003/7
Abstract: 
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 that corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the PPP puzzle.
Subjects: 
Real Exchange Rate Persistence
Purchasing Power Parity
Aggregation
Parameter Heterogeneity.
JEL: 
F36
F41
C43
Document Type: 
Working Paper

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