TY  - JOUR
AU  - Bergin,Paul R.
AU  - Glick,Reuven
AU  - Wu,Jyh-Lin
TI  - The Micro-Macro Disconnect of Purchasing Power Parity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15624
PY  - 2009
Y2  - December 2009
UR  - http://www.nber.org/papers/w15624
L1  - http://www.nber.org/papers/w15624.pdf
N1  - Author contact info:
Paul Bergin
Department of Economics
University of California, Davis
One Shields Ave.
Davis, CA 95616
Tel: 530/752-8398
Fax: 530/752-9382
E-Mail: prbergin@ucdavis.edu

Reuven Glick
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA  94105
Tel: 415/974-3184
Fax: 415/974-2168
E-Mail: reuven.Glick@sf.frb.org

Jyh-Lin Wu
Institute of Economics
National Sun Yat-sen University
70 Lien-hai Rd.
Kaohsiung, Taiwan
E-Mail: ecdjlw@ccu.edu.tw
AB  - 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.
ER  -