DP5237 'Aggregation Bias' DOES Explain the PPP Puzzle
|Author(s):||Jean Imbs, Haroon Mumtaz, Morten O Ravn, Hélène Rey|
|Publication Date:||September 2005|
|Keyword(s):||goods market integration, heterogenous dynamics, relative prices|
|JEL(s):||C23, F15, F31|
|Programme Areas:||International Macroeconomics, International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5237|
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.