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Purchasing Power Parity and aggregation bias for a developing country: The case of Mexico

  • Robertson, Raymond
  • Kumar, Anil
  • Dutkowsky, Donald H.

This paper investigates long-run Purchasing Power Parity (PPP) between the US and Mexico. We use a panel of disaggregated price data between the US and Mexico with a long time series to look at two types of aggregation bias. The first is examined in Imbs et al. -- which we refer to as estimator aggregation bias -- and the second is put forth by Broda and Weinstein -- hereafter, data aggregation bias. The findings indicate substantial estimator aggregation bias and data aggregation bias. Although estimates using aggregate data and imposing homogeneous coefficients provide little evidence of PPP, findings with disaggregated data and heterogeneous coefficient estimators offer strong support. The results also suggest the presence of small-sample bias as examined in Chen and Engel, but with little effect on the qualitative results. Tradable goods and non-tradable goods show little distinction in convergence rates. Estimated half-lives are lower under flexible than fixed exchange rates and indicate rapid convergence during the Mexican peso crisis.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 90 (2009)
Issue (Month): 2 (November)
Pages: 237-243

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Handle: RePEc:eee:deveco:v:90:y:2009:i:2:p:237-243
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  1. Christian J. Murray & David H. Papell, 2000. "The Purchasing Power Parity Persistence Paradigm," Econometric Society World Congress 2000 Contributed Papers 0017, Econometric Society.
  2. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
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  4. Alan M. Taylor & Mark Taylor, 2004. "The Purchasing Power Parity Debate," Working Papers 46, University of California, Davis, Department of Economics.
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  8. Jean Imbs & Haroon Mumtaz & Morten Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation and the Real Exchange Rate," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 1-43, January.
  9. Alba, Joseph D. & Papell, David H., 2007. "Purchasing power parity and country characteristics: Evidence from panel data tests," Journal of Development Economics, Elsevier, vol. 83(1), pages 240-251, May.
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  17. Lutz Kilian & Tao Zha, 2002. "Quantifying the uncertainty about the half-life of deviations from PPP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(2), pages 107-125.
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