TY  - JOUR
AU  - Cumby,Robert E.
TI  - Forecasting Exchange Rates and Relative Prices with the Hamburger Standard: Is What You Want What You Get With McParity?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5675
PY  - 1996
Y2  - July 1996
UR  - http://www.nber.org/papers/w5675
L1  - http://www.nber.org/papers/w5675.pdf
N1  - Author contact info:
Robert E. Cumby
Georgetown University
School of Foreign Service
Washington, DC 20057-1045
Tel: 202/687-2990
Fax: 202/687-6102
E-Mail: cumbyr@georgetown.edu
M2  - featured in NBER digest on 1997-01-01
AB  - A decade ago the Economist began an annual survey of Big Mac prices as a guide to whether currencies are trading at the right exchange rates. This paper asks how well the hamburger standard has performed. Although average deviations from absolute Big Mac parity are large for several currencies, once estimates of these average deviations are removed from the data, the evidence suggests that convergence to relative Big Mac parity is quite rapid.  The half-life of deviations from Big Mac parity appear to be about 1 year, which is considerably shorter than estimates of the half-life of deviations from purchasing power parity (4-5 years) that are reported in the literature.  In addition, deviations from relative Big Mac parity appear to provide useful information for forecasting exchange rates.  After accounting for currency-specific constants, a 10 percent undervaluation according to the hamburger standard in one year is associated with a 3.5 percent appreciation over the following year. Finally, deviations from relative Big Mac parity seem to be helpful in forecasting relative local currency prices.  When the U.S. dollar price of Big Macs is high in a country, the relative local currency price of Big Macs in that country is likely to fall during the following year.
ER  -