Work

Uncertainty in currency mispricing

Year: 2017

Type: article

Abstract: Declaring a currency to be mispriced is fraught with uncertainties. In this article, these uncertainties are explicitly recognized in a model of pricing a homogeneous commodity around the world. This allows for a common driver of prices, due to a base-currency effect, and country-specific factors that lead to departures from absolute PPP on account of income differences, local taxes and charges, etc. This approach leads to estimates of currency mispricing whose significance can be tested in the usual way. Using Big Mac prices, we show that the approach has advantages over the popular Big Mac Index to currency valuation.

Source: Applied Economics

DOI: 10.1080/00036846.2017.1394975

Authors: Kenneth Clements, Yihui Lan, Jiawei Si

Institution: The University of Western Australia

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: BHP Billiton, Australian Research Council

Award: Analysing global consumption patterns with a large number of commodities