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The Big Mac Index Two Decades On An Evaluation Of Burgernomics

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Author Info

  • Kenneth W Clements

    (UWA Business School, The University of Western Australia)

  • Yihui Lan

    (UWA Business School, The University of Western Australia)

  • Shi Pei Seah

    (UWA Business School, The University of Western Australia)

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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File URL: http://www.business.uwa.edu.au/__data/assets/pdf_file/0003/1082586/10-14_The_Big_Mac_Indes_Two_Decades_On-An_Evaluation_of_Burgernomics.pdf
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Bibliographic Info

Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 10-14.

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Length: 103 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:uwa:wpaper:10-14

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  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, Elsevier, vol. 29(7), pages 1424-1437, November.

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