engleski

Investigating the determinants of Big Mac index: A panel data analysis

Noted by several researchers, Law of One Price (LOOP) and Purchasing Power Parity (PPP) do not stand for most of the products in the short and long run. It is important to investigate what stands behind it, besides some specific additional costs that could lead to different results. Our goal is to check whether there are any general determinants that significantly affect the valuation. The oldest informal measure of PPP, Big Mac Index, created by The Economist in 1986, will be calculated to show absolute and relative parity valuation of currencies around the world. By using cross- country panel data analysis on the sample of 25 countries in the period from 2000 to 2015, main determinants of Big Mac index are investigated. The results of the analysis have shown that deviations from the parity can be explained by current account variable while other independent variables representing main determinants of Big Mac index were not significant. Furthermore, results of the analyisis indicate that relative PPP does not hold in the long run.

Big Mac index, valuation, panel data.

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