Uncertainty in Currency Mispricing

Kenneth Clements; Yihui Lan; Jiawei Si

Uncertainty in Currency Mispricing

Research output: Working paper › Discussion paper

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Abstract

Declaring a currency to be mispriced is fraught with uncertainties. In this paper, these uncertainties are explicitly recognised 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 purchasing power parity 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 language	English
Publisher	UWA Business School
Publication status	Published - 2016

Publication series

Name	Economics Discussion Papers
No.	3
Volume	16

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Uncertainty in Currency Mispricing

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