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Are hamburgers harmless?

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  • Kwok Tong Soo

Abstract

We make use of The Economist’s Big Mac Index (BMI) to investigate the Law of One Price (LOP) and whether the BMI can be used to predict future exchange rate and price changes. Deviations from Big Mac parity decay quickly, in approximately 1 year. The BMI is a better predictor of relative price changes than of exchange rate changes, and performs best when predicting a depreciation of a currency relative to the US dollar. Convergence to Big Mac parity occurs more rapidly for currencies with some form of exchange rate control than for freely floating exchange rates, which is the opposite of what we obtain using the aggregate CPI.

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  • Kwok Tong Soo, 2016. "Are hamburgers harmless?," Working Papers 127876397, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:127876397
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    References listed on IDEAS

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    More about this item

    Keywords

    Purchasing power parity; Big Mac index; panel data;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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