'Aggregation Bias' DOES Explain the PPP Puzzle

Morten Ravn, Helene Rey, Jean Imbs and Haroon Mumtaz

No 5237, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Heterogenous dynamics; Relative prices; Goods market integration (search for similar items in EconPapers)
JEL-codes: C23 F15 F31 (search for similar items in EconPapers)
Date: 2005-09
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Citations: View citations in EconPapers (7)

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