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- Title
A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates.
- Authors
Parsley, David C.; Wei, Shang-Jin
- Abstract
We match Big Mac prices with prices of its ingredients as a unique prism to study real exchange rates (RERs). This approach has several advantages. First, the levels of the Big Mac RER can be measured meaningfully. Second, as the exact composition of a Big Mac is known, the contributions of its tradable and non-tradable components can be estimated relatively precisely. Third, the dynamics of the RER can be studied in a setting free of several biases inherent in CPI-based RERs. Finally, a large cross-country dimension allows us to overturn the Engel result on what drives RERs. In most economies, the exchange rate is the single most important relative price, one that potentially feeds back into a large range of transactions. Obstfeld and Rogoff (2000)
- Subjects
FOREIGN exchange rates; FOOD prices; ENGEL'S law; FOOD consumption; BEEF; COOKING; CONSUMER price indexes
- Publication
Economic Journal, 2007, Vol 117, Issue 523, p1336
- ISSN
0013-0133
- Publication type
Article
- DOI
10.1111/j.1468-0297.2007.02085.x