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Disaggregate Real Exchange Rate Behaviour

  • Giorgio Fazio
  • Ronald MacDonald
  • Peter McAdam

In this paper, we re-examine the “PPP Puzzle” using sectoral disaggregated data. Specifically, we first analyse the mean reversion speeds of real exchange rates for a number of different sectors in eleven industrial economies and then focus on relating these rates to variables identified in the literature as key determinants of CPI-based real exchange rates, namely: the trade balance, productivity and the mark up. In particular, we seek to understand to what extent the relationships existing at the aggregate level are borne out at the disaggregate level. We believe that this analysis can help shed light on the PPP puzzle.

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File URL: http://www.gla.ac.uk/media/media_33619_en.pdf
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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2007_19.

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Date of creation: Jul 2007
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Handle: RePEc:gla:glaewp:2007_19
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  1. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Helene Rey, 2003. "PPP Strikes Back: Aggregation and the Real Exchange Rate," IEHAS Discussion Papers 0307, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
  3. M. Ali Khan, 2007. "Perfect Competition," PIDE-Working Papers 2007:15, Pakistan Institute of Development Economics.
  4. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  5. Cheung, Yin-Wong & Chinn, Menzie & Fujii, Eiji, 2001. "Market Structure and the Persistence of Sectoral Real Exchange Rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(2), pages 95-114, April.
  6. R. Macdonald & L. Ricci, 2003. "PPP and the Balassa Samuelson Effect: The Role of the DistributionSector," DNB Staff Reports (discontinued) 81, Netherlands Central Bank.
  7. Lane, Philip R. & Gian Maria Milesi-Ferretti, 2002. "External Wealth, the Trade Balance, and the Real Exchange Rate," Royal Economic Society Annual Conference 2002 119, Royal Economic Society.
  8. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  9. DavidC. Parsley & Shang-Jin Wei, 2007. "A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates," Economic Journal, Royal Economic Society, vol. 117(523), pages 1336-1356, October.
  10. Imbs, Jean & Mumtaz, Haroon & Ravn, Morten O & Rey, Hélène, 2005. "'Aggregation Bias' DOES Explain the PPP Puzzle," CEPR Discussion Papers 5237, C.E.P.R. Discussion Papers.
  11. Chihwa Kao & Min-Hsien Chiang, 1999. "On the Estimation and Inference of a Cointegrated Regression in Panel Data," Center for Policy Research Working Papers 2, Center for Policy Research, Maxwell School, Syracuse University.
  12. MacDonald, Ronald & Ricci, Luca Antonio, 2007. "Real exchange rates, imperfect substitutability, and imperfect competition," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 639-664, December.
  13. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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