Spatial considerations on the PPP debate
AbstractThis paper studies the influence of aggregating across space when (i) testing the PPP theory or more generally pair-wise cointegration and (ii) evaluating the PPP puzzle. Our contribution is threefold: we show that aggregating foreign data and applying an ADF test may lead to erroneously reject the PPP hypothesis. We then show, on the basis of theoretical arguments as well as Monte Carlo experiments, that a sizable bias in the estimates of half-life deviations to PPP may be due to the effect of aggregation across space. We finally illustrate empirically the importance of spatial considerations when estimating the speed of price convergence among euro area countries. JEL Classification: C23, F41
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Date of creation: Apr 2013
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Other versions of this item:
- Michele Ca'Zorzi & Alexander Chudik, 2013. "Spatial considerations on the PPP debate," Globalization and Monetary Policy Institute Working Paper 138, Federal Reserve Bank of Dallas.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-23 (All new papers)
- NEP-GEO-2013-08-23 (Economic Geography)
- NEP-OPM-2013-08-23 (Open Economy Macroeconomic)
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