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Home Bias and Purchasing Power Parity: Evidence from the G-7 Countries

  • Nikolaos Mylonidis

    (University of Ioannina)

  • Dimitrios Sideris

    ()

    (Bank of Greece and University of Ioannina)

Recent studies in the international economics literature emphasize the role of home bias in explaining a number of empirical puzzles. In the present study, we test for the following hypotheses: (i) that a home bias effect, which is nevertheless falling over time as traded goods markets become more integrated and consumption preferences become more similar across developed countries, influences the relationship among nominal exchange rates, domestic prices and foreign prices, and (ii) that incorporation of the home bias effect in the empirical specification of PPP enhances the robustness of the theory. We perform a panel data analysis using quarterly observations for the G-7 economies in the post-Bretton Woods era. The results confirm our hypotheses.

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Paper provided by Bank of Greece in its series Working Papers with number 59.

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Length: 15 pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:bog:wpaper:59
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  1. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  2. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
  3. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
  4. Mark Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 1-17.
  5. Hegwood, Natalie D & Papell, David H, 1998. "Quasi Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-89, October.
  6. Brissimis, Sophocles N. & Sideris, Dimitris A. & Voumvaki, Fragiska K., 2005. "Testing long-run purchasing power parity under exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 959-981, October.
  7. Warnock, Francis E., 2003. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 343-363, June.
  8. Stein, Jerome L., 1990. "The real exchange rate," Journal of Banking & Finance, Elsevier, vol. 14(5), pages 1045-1078, November.
  9. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  10. Wu, Jyh-Lin & Chen, Show-Lin, 1999. "Are Real Exchange Rates Stationary Based on Panel Unit-Root Tests? Evidence from Pacific Basin Countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(3), pages 243-52, July.
  11. Sideris, Dimitrios A., 2008. "Foreign exchange intervention and equilibrium real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 344-357, October.
  12. Bruce A. Blonigen & Wesley W. Wilson, 1999. "Explaining Armington: What Determines Substitutability Between Home and Foreign Goods?," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 1-21, February.
  13. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02.
  14. Georgopoulos, George J. & Hejazi, Walid, 2005. "Feldstein-Horioka meets a time trend," Economics Letters, Elsevier, vol. 86(3), pages 353-357, March.
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