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Uncertainty in currency mispricing

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  • Kenneth Clements
  • Yihui Lan
  • Jiawei Si

Abstract

Declaring a currency to be mispriced is fraught with uncertainties. In this article, these uncertainties are explicitly recognized in a model of pricing a homogeneous commodity around the world. This allows for a common driver of prices, due to a base-currency effect, and country-specific factors that lead to departures from absolute PPP on account of income differences, local taxes and charges, etc. This approach leads to estimates of currency mispricing whose significance can be tested in the usual way. Using Big Mac prices, we show that the approach has advantages over the popular Big Mac Index to currency valuation.

Suggested Citation

  • Kenneth Clements & Yihui Lan & Jiawei Si, 2018. "Uncertainty in currency mispricing," Applied Economics, Taylor & Francis Journals, vol. 50(20), pages 2297-2312, April.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:20:p:2297-2312
    DOI: 10.1080/00036846.2017.1394975
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    Cited by:

    1. Shapovalova, Daria & Stephen, Kathrin, 2019. "No race for the Arctic? Examination of interconnections between legal regimes for offshore petroleum licensing and level of industry activity," Energy Policy, Elsevier, vol. 129(C), pages 907-917.
    2. Marek Vochozka & Jakub Horák & Petr Šuleř, 2019. "Equalizing Seasonal Time Series Using Artificial Neural Networks in Predicting the Euro–Yuan Exchange Rate," JRFM, MDPI, vol. 12(2), pages 1-17, April.
    3. Nocera, Silvio & Fabio, Alberto & Cavallaro, Federico, 2020. "The adoption of grid transit networks in non-metropolitan contexts," Transportation Research Part A: Policy and Practice, Elsevier, vol. 132(C), pages 256-272.
    4. Lenz, Luciane & Munyehirwe, Anicet & Peters, Jörg & Sievert, Maximiliane, 2017. "Does Large-Scale Infrastructure Investment Alleviate Poverty? Impacts of Rwanda’s Electricity Access Roll-Out Program," World Development, Elsevier, vol. 89(C), pages 88-110.

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