Uncertainty in currency mispricing

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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.

Original languageEnglish
Pages (from-to)2297-2312
Number of pages16
JournalApplied Economics
Volume50
Issue number20
Early online date6 Nov 2017
DOIs
Publication statusPublished - 27 Apr 2018

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