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Extrapolation Of Purchasing Power Parities Using Multiple Benchmarks And Auxiliary Information: A New Approach

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  • D. S. Prasada Rao
  • Alicia Rambaldi
  • Howard Doran

Abstract

The paper presents an econometric framework for the construction of a consistent panel of purchasing power parities (PPPs) which makes it possible to combine all the PPP benchmark data from various phases of the International Comparison Program with the data on national price movements in the form of implicit deflators from national accounts. The method improves upon the current practice used in the construction of the Penn World Tables (PWT), and similar tables produced by the World Bank which tend to be anchored on a selected benchmark. The econometric formulation is based on a regression model for the national price levels where the disturbances are assumed to be heteroskedastic and spatially correlated across countries. The regression model along with data on country specific price movements are combined using a state-space formulation and optimum predictions of PPPs are obtained. As a property of the method presented in the paper, we show that the resulting PPP predictions are weighted averages of extrapolations of PPPs from different benchmarks-thus the method provides a formal approach which has a simple intuitive interpretation. The smoothed PPP predictions (and standard errors) obtained through the state-space are produced for both ICP-participating and non-participating countries and non-benchmark years. A complete tableau of PPPs for 141 countries spanning the period 1970 to 2005 is compiled using the method. Results for some selected countries are presented and the new series are compared and contrasted with the currently available PWT series. Extrapolated series for the remaining countries are available from the authors upon request. Copyright 2010 The Authors. Journal compilation International Association for Research in Income and Wealth 2010.

Suggested Citation

  • D. S. Prasada Rao & Alicia Rambaldi & Howard Doran, 2010. "Extrapolation Of Purchasing Power Parities Using Multiple Benchmarks And Auxiliary Information: A New Approach," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 59-98, June.
  • Handle: RePEc:bla:revinw:v:56:y:2010:i:s1:p:s59-s98
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    References listed on IDEAS

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    1. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521405737, October.
    2. Maddison, Angus, 2007. "Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History," OUP Catalogue, Oxford University Press, number 9780199227204.
    3. Xavier Sala-i-Martin, 2002. "15 Years of New Growth Economics : What Have we Learnt?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(2), pages 5-15, August.
    4. Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-334, March.
    5. Warwick J. McKibbin & Alison Stegman, 2005. "Convergence And Per Capita Carbon Emissions," CAMA Working Papers 2005-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Summers, Robert & Heston, Alan, 1988. "A New Set of International Comparisons of Real Product and Price Levels Estimates for 130 Countries, 1950-1985," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 34(1), pages 1-25, March.
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    Cited by:

    1. Robert J. Hill & Alice O. Nakamura, 2010. "Improving Inflation And Related Performance Measures For Nations: An Introduction," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 1-10, June.
    2. Majumder, Amita & Ray, Ranjan & Sinha, Kompal, 2015. "Spatial Comparisons Of Prices And Expenditure In A Heterogeneous Country: Methodology With Application To India," Macroeconomic Dynamics, Cambridge University Press, vol. 19(05), pages 931-989, July.
    3. Hosseiny, Ali, 2017. "A geometrical imaging of the real gap between economies of China and the United States," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 479(C), pages 151-161.
    4. Ali Hosseiny, 2015. "Violation of Invariance of Measurement for GDP Growth Rate and its Consequences," Papers 1507.04848, arXiv.org, revised Aug 2016.
    5. Robert Inklaar, 2013. "“Price Levels and Economic Growth: Making Sense of Revisions to Data on Real Incomes”: A Comment," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 59(4), pages 614-622, December.
    6. Robert Hill & Daniel Melser, 2015. "Benchmark averaging and the measurement of changes in international income inequality," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(4), pages 767-801, November.

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