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The Big Mac Standard: A Statistical Illustration

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  • Fujiki, Hiroshi
  • Kitamura, Yukinobu

Abstract

We demonstrate a statistical procedure for selecting the most suitable empirical model to test an economic theory, using the example of the test for purchasing power parity based on the Big Mac Index. Our results show that supporting evidence for purchasing power parity, conditional on the Balassa-Samuelson effect, depends crucially on the selection of models, sample periods and economies used for estimations.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13805/1/DP446.pdf
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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a446.

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Length: 20 p.
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:hit:hituec:a446

Note: Bibliography: p. 11-12, First Draft: March, 1997; Second Draft: September, 2002; Revised: October, 2003
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Keywords: Big Mac Index; Purchasing Power Parity; Panel Data;

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References

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  2. Wu, Yangru, 1996. "Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 54-63, February.
  3. Fujiki, Hiroshi & Hsiao, Cheng & Shen, Yan, 2002. "Is There a Stable Money Demand Function under the Low Interest Rate Policy? A Panel Data Analysis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(2), pages 1-23, April.
  4. Phillips, P C B & Durlauf, S N, 1986. "Multiple Time Series Regression with Integrated Processes," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 473-95, August.
  5. Ong, Li Lian, 1997. "Burgernomics: the economics of the Big Mac standard," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 865-878, December.
  6. Hiroshi Fujiki & Yukinobu Kitamura, 1994. "Feldstein-Horioka Paradox Revisited," Discussion Paper Series a298, Institute of Economic Research, Hitotsubashi University.
  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  8. Hsaio, Cheng & Pesaran, M. Hashem & Tahmiscioglu, A. Kamil, 1998. "Maximum Likelihood Estimation of Fixed Effects Dynamic Panel Data Models Covering Short Time Periods," Cambridge Working Papers in Economics 9826, Faculty of Economics, University of Cambridge.
  9. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  10. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  11. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
  12. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
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Cited by:
  1. Sidney Caetano & Guilherme Moura & Sergio Da Silva, 2004. "Big Mac Parity, Income, and Trade," International Finance 0407011, EconWPA.
  2. Joe Cox, 2008. "Purchasing power parity and cultural convergence: evidence from the global video games market," Journal of Cultural Economics, Springer, vol. 32(3), pages 201-214, September.

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