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The Big Mac Index two decades on: an evaluation of burgernomics
Author(s) -
Clements Kenneth W.,
Lan Yihui,
Seah Shi Pei
Publication year - 2012
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.432
Subject(s) - relative purchasing power parity , economics , index (typography) , purchasing power parity , currency , value (mathematics) , random walk , econometrics , term (time) , exchange rate , monetary economics , price index , financial economics , statistics , mathematics , computer science , physics , quantum mechanics , world wide web
The Big Mac Index, introduced by The Economist magazine more than two decades ago, claims to provide the ‘true value’ of a large number of currencies. This paper assesses the economic value of this index. We show that (i) the index suffers from a substantial bias; (ii) once the bias is allowed for, the index tracks exchange rates reasonably well over the medium to longer term in accordance with relative purchasing power parity theory; (iii) the index is at least as good as the industry standard, the random walk model, in predicting future currency values for all but short‐term horizons; and (iv) future nominal exchange rates are more responsive than prices to currency mispricing. While not perfect, at a cost of less than $US10 per year, the index seems to provide good value for money. Copyright © 2011 John Wiley & Sons, Ltd.