Working Paper: CEPR ID: DP5237
Authors: Jean Imbs; Haroon Mumtaz; Morten O. Ravn; Hélène Rey
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.
Keywords: Goods Market Integration; Heterogeneous Dynamics; Relative Prices
JEL Codes: C23; F15; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregation bias (C43) | persistence of real exchange rates (F31) |
| heterogeneity of price dynamics across sectors (E30) | aggregation bias (C43) |
| aggregation bias (C43) | misinterpretation of the PPP puzzle (C54) |
| estimated persistence of real exchange rates (F31) | misinterpretation of the PPP puzzle (C54) |
| aggregation bias (C43) | halflife of real exchange rates (F31) |