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The Micro-Macro Disconnect of Purchasing Power Parity

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Paul R. Bergin & Reuven Glick & Jyh-Lin Wu, 2013. "The Micro-Macro Disconnect of Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 798-812, July.
  • Handle: RePEc:tpr:restat:v:95:y:2013:i:3:p:798-812
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Deviations from PPP: a micro-macro disconnect?
      by Economic Logician in Economic Logic on 2010-07-21 19:22:00

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    Cited by:

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    2. Bergin, Paul R. & Glick, Reuven & Wu, Jyh-Lin, 2014. "Mussa redux and conditional PPP," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 101-114.
    3. Bergin, Paul R. & Glick, Reuven & Wu, Jyh-Lin, 2017. "“Conditional PPP” and real exchange rate convergence in the euro area," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 78-92.
    4. Michele Ca’ Zorzi & Jakub Muck & Michal Rubaszek, 2016. "Real Exchange Rate Forecasting and PPP: This Time the Random Walk Loses," Open Economies Review, Springer, vol. 27(3), pages 585-609, July.
    5. Distefano, Tiziano & Chiarotti, Guido & Laio, Francesco & Ridolfi, Luca, 2019. "Spatial Distribution of the International Food Prices: Unexpected Heterogeneity and Randomness," Ecological Economics, Elsevier, vol. 159(C), pages 122-132.
    6. Morrison, Michael & Fontenla, Matías, 2017. "Purchasing power parity across eight worlds," Economics Letters, Elsevier, vol. 158(C), pages 62-66.
    7. Ca’ Zorzi, Michele & Kolasa, Marcin & Rubaszek, Michał, 2017. "Exchange rate forecasting with DSGE models," Journal of International Economics, Elsevier, vol. 107(C), pages 127-146.
    8. Daniel M. Bernhofen & Markus Eberhardt & Jianan Li & Stephen Morgan, 2015. "Assessing Market (Dis)Integration in Early Modern China and Europe," CESifo Working Paper Series 5580, CESifo.
    9. Marina Glushenkova & Andros Kourtellos & Marios Zachariadis, 2018. "Barriers to price convergence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(7), pages 1081-1097, November.
    10. Strasser, Georg, 2013. "Exchange rate pass-through and credit constraints," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 25-38.
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    More about this item

    Keywords

    exchange rates; prices;

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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