Does 'aggregation bias' explain the PPP puzzle?
Resource
Pacific Economic Review, 10(1),?49-72
Journal
Pacific Economic Review
Journal Volume
10
Journal Issue
1
Pages
49-72
Date Issued
2005
Author(s)
Abstract
Abstract. Recently, Jean Imbs and colleagues have claimed that much of the purchasing power parity puzzle can be explained by ‘aggregation bias’. This paper re‐examines aggregation bias. It clarifies the meaning of aggregation bias and its applicability to the PPP puzzle; demonstrates that the size of the ‘bias’ is much smaller than suggested if explosive roots in the simulations are ruled out; and shows that the presence of non‐persistent measurement error data can make price series appear less persistent than they are. After correcting for small‐sample bias, half‐life estimates indicate that heterogeneity and aggregation bias do not help to solve the PPP puzzle.
SDGs
Type
journal article
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