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Home bias and purchasing power parity: evidence from the G‐7 countries
Author(s) -
Mylonidis Nikolaos,
Sideris Dimitrios
Publication year - 2008
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.339
Subject(s) - economics , purchasing power parity , robustness (evolution) , econometrics , relative purchasing power parity , empirical research , consumption (sociology) , panel data , monetary economics , exchange rate , biochemistry , chemistry , philosophy , epistemology , gene , social science , sociology
Abstract 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 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. Copyright © 2007 John Wiley & Sons, Ltd.