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Discussion Paper Details

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Title: 'Aggregation Bias' DOES Explain the PPP Puzzle

Author(s): Jean Imbs, Haroon Mumtaz, Morten O Ravn and Hélène Rey

Publication Date: September 2005

Keyword(s): goods market integration, heterogenous dynamics and relative prices

Programme Area(s): International Macroeconomics and International Trade and Regional Economics

Abstract: This article summarizes our views on the role of an 'aggregation bias' in explaining the PPP Puzzle, in response to the several papers recently written in reaction to our initial contribution. We discuss in particular the criticisms of Imbs, Mumtaz, Ravn and Rey (2002) presented in Chen and Engel (2005). We show that their contentions are based on: (i) analytical counter-examples which are not empirically relevant; (ii) simulation results minimizing the extent of 'aggregation bias'; (iii) unfounded claims on the impact of measurement errors on our results; and (iv) problematic implementation of small-sample bias corrections. We conclude, as in our original paper, that 'aggregation bias' goes a long way towards explaining the PPP puzzle.

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Bibliographic Reference

Imbs, J, Mumtaz, H, Ravn, M and Rey, H. 2005. ''Aggregation Bias' DOES Explain the PPP Puzzle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5237