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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. Shiu-Sheng Chen & Charles Engel, 2004. "Does "Aggregation Bias" Explain the PPP Puzzle?," NBER Working Papers 10304, National Bureau of Economic Research, Inc.
  2. 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.
  3. Koenker, Roger & Xiao, Zhijie, 2006. "Quantile Autoregression," Journal of the American Statistical Association, American Statistical Association, vol. 101, pages 980-990, September.
  4. Taylor, Alan M. & Taylor, Mark P, 2004. "The Purchasing Power Parity Debate," CEPR Discussion Papers 4495, C.E.P.R. Discussion Papers.
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  14. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  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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  19. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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