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The Micro-Macro Disconnect of Purchasing Power Parity

  • 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)

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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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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