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PPP Strikes Back: Aggregation And the Real Exchange Rate
Open accessAbstract
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 that corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the PPP puzzle.
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Cited by
International Trade and Macroeconomic Dynamics with Heterogeneous Firms
Ghironi, F., & Melitz, M. J. (2005) · The Quarterly Journal of Economics · doi:10.1093/qje/120.3.865 · Cited by 587
Why has under-5 mortality decreased at such different rates in different countries?
Jamison, D. T., Murphy, S. M., & Sandbu, M. E. (2016) · Journal of Health Economics · doi:10.1016/j.jhealeco.2016.03.002 · Cited by 72
Gorodnichenko, Y., & Talavera, O. (2017) · American Economic Review · doi:10.1257/aer.20141127 · Cited by 43
Metadata
- Authors
- Imbs, J., Mumtaz, H., Ravn, M. O., & Rey, H.
- Venue
- The Quarterly Journal of Economics
- Publisher
- Oxford University Press (OUP)
- Published
- 2005-02-01
- Volume
- 120
- Issue
- 1
- Pages
- 1-43
- ISSN
- 0033-5533 (ISSN-L)
- 1531-4650
- OpenAlex
- W2891641280
- Cited by
- 470
- References
- 50
- FWCI
- 36.22
- Type
- journal article
- Language
- en
- Open access
- green
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