A Prism into the PPP Puzzles: The Microfoundations of Big Mac Real Exchange Rates
Coauthor(s): David Parsley.
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We match Big Mac prices with prices of its ingredients as a unique prism to study real exchange rates (RERs). This approach has several advantages. First, the levels of the Big Mac RER can be measured
meaningfully. Second, as the exact composition of a Big Mac is known, the contributions of its tradable and non-tradable components can be estimated relatively precisely. Third, the dynamics of
the RER can be studied in a setting free of several biases inherent in CPI-based RERs. Finally, a large cross-country dimension allows us to overturn the Engel result on what drives RERs.
Source: The Economic Journal
Parsley, David, and Shang-Jin Wei. "A Prism into the PPP Puzzles: The Microfoundations of Big Mac Real Exchange Rates." The Economic Journal 117, no. 523 (October 2007): 1336-1356.