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The Micro-Macro Disconnect of Purchasing Power Parity

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Author Info

  • Paul R. Bergin

    (University of California at Davis and NBER)

  • Reuven Glick

    (Federal Reserve Bank of San Francisco)

  • Jyh-Lin Wu

    (National Sun Yat-Sen University)

Abstract

This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Error correction model estimates indicate that a different mix of shocks drives international price deviations at the microeconomic level and that dynamic adjustment works through arbitrage in the goods market rather than the foreign exchange market. When half-lives are estimated conditional on a common set of estimated macro shocks, we find that micro relative prices exhibit every bit as much persistence as aggregate real exchange rates. These results challenge theories of real exchange rate persistence based on sticky prices and heterogeneity across goods. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 95 (2013)
Issue (Month): 3 (July)
Pages: 798-812

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Handle: RePEc:tpr:restat:v:95:y:2013:i:3:p:798-812

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Keywords: exchange rates; prices;

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References

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  4. Maćkowiak, Bartosz & Wiederholt, Mirko, 2009. "Optimal sticky prices under rational inattention," Working Paper Series, European Central Bank 1009, European Central Bank.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Deviations from PPP: a micro-macro disconnect?
    by Economic Logician in Economic Logic on 2010-07-21 14:22:00
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Cited by:
  1. Georg H. Strasser, 2011. "Exchange Rate Pass-Through and Credit Constraints: Firms Price to Market as Long as They Can," Boston College Working Papers in Economics, Boston College Department of Economics 788, Boston College Department of Economics, revised 13 Feb 2012.
  2. Takayuki Tsuruga & Mototsugu Shintani & Mario J. Crucini, 2011. "Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level?," 2011 Meeting Papers, Society for Economic Dynamics 784, Society for Economic Dynamics.

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