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 -