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"Aggregation Bias" DOES Explain the PPP Puzzle

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  • Jean Imbs
  • Haroon Mumtaz
  • Morten O. Ravn
  • Hélène Rey

Abstract

This article summarizes our views on the role of an "aggregation bias" in explaining the PPP Puzzle, in response to the several papers recently written in reaction to our initial contribution. We discuss in particular the criticisms of Imbs, Mumtaz, Ravn and Rey (2002) presented in Chen and Engel (2005). We show that their contentions are based on: (i) analytical counter-examples which are not empirically relevant; (ii) simulation results minimizing the extent of "aggregation bias"; (iii) unfounded claims on the impact of measurement errors on our results; and (iv) problematic implementation of small-sample bias corrections. We conclude, as in our original paper, that "aggregation bias" goes a long way towards explaining the PPP puzzle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11607.

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Date of creation: Sep 2005
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Handle: RePEc:nbr:nberwo:11607

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  1. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics, EconWPA 0509017, EconWPA, revised 12 Sep 2005.
  2. Jean Imbs & Haroon Mumtaz & Morten O. Ravn & Helene Rey, 2003. "PPP Strikes Back: Aggregation and the Real Exchange Rate," IEHAS Discussion Papers 0307, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Shiu-Sheng Chen & Charles Engel, 2004. "Does "Aggregation Bias" Explain the PPP Puzzle?," NBER Working Papers 10304, National Bureau of Economic Research, Inc.
  4. Boyd, Derick & Smith, Ron, 1999. "Testing for Purchasing Power Parity: Econometric Issues and an Application to Developing Countries," Manchester School, University of Manchester, vol. 67(3), pages 287-303, June.
  5. Haroon Mumtaz & Jean Imbs & Morten O. Ravn & Helene Rey, 2003. "PPP Strikes Back," IMF Working Papers 03/68, International Monetary Fund.
  6. Donggyu Sul & Peter C.B. Phillips & Choi, Chi-Young, 2003. "Prewhitening Bias in HAC Estimation," Cowles Foundation Discussion Papers 1436, Cowles Foundation for Research in Economics, Yale University.
  7. Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C95-052, University of California at Berkeley.
  8. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  9. Mario J. Crucini & Mototsugu Shintani, 2006. "Persistence in Law-of-One-Price Deviations: Evidence from Micro-data," Levine's Bibliography 321307000000000311, UCLA Department of Economics.
  10. Pesaran, H.M., 2003. "Estimation and Inference in Large Heterogeneous Panels with Cross Section Dependence," Cambridge Working Papers in Economics 0305, Faculty of Economics, University of Cambridge.
  11. Kajal Lahiri, 2005. "Analysis of Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 87(4), pages 1093-1095.
  12. So, Beong Soo & Shin, Dong Wan, 1999. "Recursive mean adjustment in time-series inferences," Statistics & Probability Letters, Elsevier, vol. 43(1), pages 65-73, May.
  13. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06.
  14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  15. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
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Cited by:
  1. Carlos Carvalho & Fernanda Nechio, 2010. "Aggregation and the PPP puzzle in a sticky-price model," Working Paper Series 2010-06, Federal Reserve Bank of San Francisco.
  2. Giorgio Fazio & Ronald MacDonald & Peter McAdam, 2007. "Disaggregate Real Exchange Rate Behaviour," Working Papers, Business School - Economics, University of Glasgow 2007_19, Business School - Economics, University of Glasgow.
  3. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
  4. M. Dolores Gadea & Laura Mayoral, 2009. "Aggregation is not the solution: the PPP puzzle strikes back," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(6), pages 875-894.
  5. Berka, Martin, 2006. "Non-linear adjustment in law of one price deviations and physical characteristics of goods," MPRA Paper 8606, University Library of Munich, Germany, revised Dec 2007.
  6. Mayoral, Laura & Dolores Gadea, María, 2011. "Aggregate real exchange rate persistence through the lens of sectoral data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(3), pages 290-304.

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