Abstract
ABSTRACTThe 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.
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