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DOES ‘AGGREGATION BIAS’ EXPLAIN THE PPP PUZZLE?
Author(s) -
Chen ShiuSheng,
Engel Charles
Publication year - 2005
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/j.1468-0106.2005.00260.x
Subject(s) - economics , purchasing power parity , econometrics , explosive material , monetary economics , chemistry , exchange rate , organic chemistry
. 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.