NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Micro-Macro Disconnect of Purchasing Power Parity

Paul R. Bergin, Reuven Glick, Jyh-Lin Wu

NBER Working Paper No. 15624
Issued in December 2009
NBER Program(s):   IFM

This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Panel estimation of an error correction model using a micro data set uncovers new stylized facts regarding this puzzle. First, adjustment to purchasing power parity deviations in aggregated data is not just a slower version of adjustment to the law of one price in microeconomic data, as arbitrage occurs in different markets, in response to distinct macroeconomic and microeconomic shocks. Second, when half-lives are estimated conditional on macro shocks, micro relative prices exhibit just as much persistence as aggregate real exchange rates. These results challenge theories of real exchange rate persistence based on sticky prices and on heterogeneity across goods, and support an explanation based on the presence of distinct macro and microeconomic shocks.

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This paper was revised on March 6, 2012

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Document Object Identifier (DOI): 10.3386/w15624

Published: 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. citation courtesy of

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