Spatial considerations on the PPP debate

Michele Ca' Zorzi and Alexander Chudik

No 138, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper studies the influence of aggregating across space when (i) testing the PPP theory or more generally pair-wise cointegration and (ii) evaluating the PPP puzzle. Our contribution is threefold: we show that aggregating foreign data and applying an ADF test may lead to erroneously reject the PPP hypothesis. We then show, on the basis of theoretical arguments as well as Monte Carlo experiments, that a sizable bias in the estimates of half-life deviations to PPP may be due to the effect of aggregation across space. We finally illustrate empirically the importance of spatial considerations when estimating the speed of price convergence among euro area countries.

Keywords: Macroeconomics (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-opm
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Working Paper: Spatial considerations on the PPP debate (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:138

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