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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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    Cited by:

    1. repec:eee:inecon:v:107:y:2017:i:c:p:127-146 is not listed on IDEAS
    2. M. Ege Yazgan & Hakan Yilmazkuday, 2016. "High versus low inflation: implications for price-level convergence," Empirical Economics, Springer, vol. 50(4), pages 1527-1563, June.
    3. Marina Glushenkova & Andros Kourtellos & Marios Zachariadis, 2016. "Barriers to price convergence," University of Cyprus Working Papers in Economics 02-2016, University of Cyprus Department of Economics.
    4. Andrade, Philippe & Zachariadis, Marios, 2016. "Global versus local shocks in micro price dynamics," Journal of International Economics, Elsevier, vol. 98(C), pages 78-92.
    5. Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2013. "Do sticky prices increase real exchange rate volatility at the sector level?," European Economic Review, Elsevier, vol. 62(C), pages 58-72.
    6. 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.
    7. 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.
    8. Strasser, Georg, 2013. "Exchange rate pass-through and credit constraints," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 25-38.
    9. 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.
    10. Nicolas Cachanosky, 2014. "The Mises-Hayek business cycle theory, fiat currencies and open economies," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(3), pages 281-299, September.
    11. repec:eee:ecolet:v:158:y:2017:i:c:p:62-66 is not listed on IDEAS
    12. Daniel Bernhofen & Markus Eberhardt & Jianan Li & Stephen Morgan, 2015. "Assessing Market (Dis)Integration in Early Modern China and Europe," Discussion Papers 2015-12, University of Nottingham, GEP.
    13. 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.

    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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