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A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates

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Author Info
DavidC. Parsley
Shang-Jin Wei

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Abstract

We match Big Mac prices with prices of its ingredients as a unique prism to study real exchange rates (RERs). This approach has several advantages. First, the "levels" of the Big Mac RER can be measured meaningfully. Second, as the "exact" composition of a Big Mac is known, the contributions of its tradable and non-tradable components can be estimated relatively precisely. Third, the dynamics of the RER can be studied in a setting free of several biases inherent in CPI-based RERs. Finally, a large cross-country dimension allows us to overturn the Engel result on what drives RERs. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2007.02085.x
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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 117 (2007)
Issue (Month): 523 (October)
Pages: 1336-1356
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Handle: RePEc:ecj:econjl:v:117:y:2007:i:523:p:1336-1356

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Paul G. J. O'Connell & Shang-Jin Wei, 1997. ""The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged," NBER Working Papers 6089, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. O'Connell, P. G. J., 1998. "Market frictions and real exchange rates1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 71-95, February. [Downloadable!] (restricted)
  3. Kenneth A. Froot & Kenneth Rogoff, 1996. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Jean Imbs & Haroon Mumtaz & Morton O. Ravn & Helene Rey, 2002. "PPP Strikes Back: Aggregation and the Real Exchange Rate," NBER Working Papers 9372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Click, Reid W., 1996. "Contrarian MacParity," Economics Letters, Elsevier, vol. 53(2), pages 209-212, November. [Downloadable!] (restricted)
  6. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 533-63, July.
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  7. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Working Papers 3684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Dornbusch, Rudiger, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Blackwell Publishing, vol. 91(2), pages 401-32.
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  9. Enrique G. Mendoza, 2000. "On the Instability of Variance Decompositions of the Real Exchange Rate across Exchange-Rate-Regimes: Evidence from Mexico and the United States," NBER Working Papers 7768, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier. [Downloadable!] (restricted)
  11. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
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  12. Matthias Lutz, 2002. "Beyond Burgernomics and MacParity: Exchange Rate Forecasts Based on the Law of One Price," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D4-1, International Conferences on Panel Data. [Downloadable!]
  13. Puumanen, Kari, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Blackwell Publishing, vol. 91(2), pages 433-34.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Michael Funke & Jörg Rahn, 2005. "Just how Undervalued is the Chinese Renminbi," Quantitative Macroeconomics Working Papers 20504, Hamburg University, Department of Economics. [Downloadable!]
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  3. James Laurenceson & Kam Ki Tang, . "China’s Equilibrium Exchange Rate and Trade Balance: A Tale of Apples and Pirates," EAERG Discussion Paper Series 0805, School of Economics, University of Queensland, Australia. [Downloadable!]
  4. James Laurenceson & Kam Ki Tang, . "Measuring long-run equilibrium exchange rates using standardized products with different specifications," EAERG Discussion Paper Series 1105, School of Economics, University of Queensland, Australia. [Downloadable!]
  5. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government. [Downloadable!]
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  6. Fougere, Denis & Gautier, Erwan & Le Bihan, Herve, 2008. "Restaurant Prices And The Minimum Wage," Working Papers 44084, American Association of Wine Economists. [Downloadable!]
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  7. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2008. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Working Papers 0810, Department of Economics, Vanderbilt University. [Downloadable!]
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  8. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2008. "Accounting for persistence and volatility of good-level real exchange rates: the role of sticky information," Globalization and Monetary Policy Institute Working Paper 07, Federal Reserve Bank of Dallas. [Downloadable!]
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  9. Jeffrey A. Frankel & David C. Parsley & Shang-Jin Wei, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," NBER Working Papers 11199, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Hirsch, Barry, 2008. "Wage Gaps Large and Small," IZA Discussion Papers 3375, Institute for the Study of Labor (IZA). [Downloadable!]
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  11. Michael Funke & Jorg Rahn, 2004. "By How Much Is The Chinese Renminbi Undervalued?," Money Macro and Finance (MMF) Research Group Conference 2004 40, Money Macro and Finance Research Group. [Downloadable!]
  12. Kenneth W. Clements & Yihui Lan, 2005. "How Long is the Long Run? Evidence from the Foreign Exchange Market," Economics Discussion / Working Papers 05-03, The University of Western Australia, Department of Economics. [Downloadable!]
  13. Giorgio Fazio & Peter McAdam & Ronald MacDonald, 2007. "Disaggregate Real Exchange Rate Behaviour," Open Economies Review, Springer, vol. 18(4), pages 389-404, September. [Downloadable!] (restricted)
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  14. Kenneth W Clements & Yihui Lan, 2006. "A New Approach to Forecasting Exchange Rates," Economics Discussion / Working Papers 06-29, The University of Western Australia, Department of Economics. [Downloadable!]
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