TY  - JOUR
AU  - Imbs, Jean
AU  - Mumtaz, Haroon
AU  - Ravn, Morton O
AU  - Rey, Helene
TI  - PPP Strikes Back: Aggregation and the Real Exchange Rate
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9372
PY  - 2002
Y2  - December 2002
DO  - 10.3386/w9372
UR  - http://www.nber.org/papers/w9372
L1  - http://www.nber.org/papers/w9372.pdf
N1  - Author contact info:
Jean Imbs
Paris School of Economics
48 boulevard Jourdan
Paris 75014
E-Mail: jeanimbs@gmail.com

Haroon Mumtaz
Queen Mary University
E-Mail: hmumtaz@london.edu

Hélène Rey
London Business School
Regents Park
London NW1 4SA
UNITED KINGDOM
Tel: 44 2070008412
E-Mail: hrey@london.edu
AB  - We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that established time series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices. When heterogeneity is properly taken into account, estimates of the real exchange rate half-life fall dramatically, to little more than one year, or significantly below Rogoff's  consensus view' of three to five years. We show corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the puzzle. We also explain why traded goods prices account for the bulk of the persistence and volatility of the real exchange rate. The reason is that traded goods prices display dynamics that are more heterogeneous than non-traded ones.
ER  -