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Measuring long-run equilibrium exchange rates using standardized products with different specifications

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Abstract

Purchasing Power Parity (PPP) is an appealing theory of the determination of longrun equilibrium exchange rates as it is founded on the intuitive proposition that opportunities for arbitrage will not go unexploited. However, in practice, measuring PPP exchange rates is hindered by difficulties in isolating the cost of tradeable inputs in the price of a reference product basket. This paper proposes a method that can extract this component using price information embodied in slightly different specifications of otherwise identical, standardized products. The method is illustrated using two well-known information and telecommunication (ICT) products, and could readily be applied to a broader, more representative product basket.

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  • James Laurenceson & Kam Ki Tang, "undated". "Measuring long-run equilibrium exchange rates using standardized products with different specifications," EAERG Discussion Paper Series 1105, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uqeaer:11
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    File URL: http://www.uq.edu.au/economics/eaerg/dp/EAERG_DP11.pdf
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    1. 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.
    2. Ong, Li Lian, 1997. "Burgernomics: the economics of the Big Mac standard," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 865-878, December.
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