Abstract: Declaring a currency to be mispriced is fraught with uncertainties. In this presentation, I describe a new approach that explicitly recognises these uncertainties. I use a model of the price of a homogeneous commodity in different countries that allows for a common driver of prices, due to a base-currency effect, and country-specific factors leading to departures from absolute purchasing power parity on account of income differences, local taxes and charges, etc. This gives rise to an estimate of currency mispricing and its standard error. I then use the model with Big Mac prices to estimate the degree of mispricing of the Australian dollar.
Biography: Ken Clements has been at The University of Western Australia since 1981 as a Professor of Economics and since 2008, BHP Billiton Research Fellow. His research interests are in international economics, monetary economics and applied microeconomics. His research has been supported by grants from BHP Billiton and the Australian Research Council. He has recently published research in the American Journal of Agricultural Economics, Journal of Business, European Economic Review and the Journal of International Money and Finance. Cambridge University Press has published two of his books, Economics and Marijuana (with X. Zhao, 2009) and Currencies, Commodities and Consumption (2013).