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The Big Mac Index two decades on: an evaluation of burgernomics

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  • Kenneth W. Clements
  • Yihui Lan
  • Shi Pei Seah

Abstract

The Big Mac Index, introduced by The Economist magazine more than two decades ago, claims to provide the “true value” of a large number of currencies. This paper assesses the economic value of this index. We show that (i) the index suffers from a substantial bias; (ii) once the bias is allowed for, the index tracks exchange rates reasonably well over the medium to longer term in accordance with relative purchasing power parity theory; (iii) the index is at least as good as the industry standard, the random walk model, in predicting future currency values for all but shortterm horizons; and (iv) future nominal exchange rates are more responsive than prices to currency mispricing. While not perfect, at a cost of less than $US10 per year, the index seems to provide good value for money.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 17 (2012)
Issue (Month): 1 (01)
Pages: 31-60

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Handle: RePEc:wly:ijfiec:v:17:y:2012:i:1:p:31-60

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Web page: http://www.interscience.wiley.com/jpages/1076-9307/

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How good is the Big Mac index?
    by Economic Logician in Economic Logic on 2010-10-01 14:21:00
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Cited by:
  1. Clements, Kenneth W. & Lan, Yihui, 2010. "A new approach to forecasting exchange rates," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1424-1437, November.

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