Currency indexes and consistent currency misvaluation: Illustrations using Big Mac data

Abstract

A currency’s misvaluation versus an index of other currencies, termed the currency’s multilateral misvaluation, depends on the index weights. This study clarifies the idea of consistency in multilateral misvaluation and provides instructive empirical illustrations using several currency index weighting methods. For both of the Economist’s Big Mac approaches (“raw” and Adjusted) to intrinsic foreign exchange value, the study finds that a multilateral currency misvaluation estimate based on an equal-weight index does not necessarily provide a reasonable approximation to the estimate of a more economically-meaningful currency index.