Aggregation is not the solution: the PPP puzzle strikes back

María Dolores Gadea Rivas · Laura Mayoral

19 citations0/0 files storedJournal of Applied Econometrics

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

Abstract Recently, Imbs, Mumtaz, Ravn and Rey (2005, hereinafter IMRR) have argued that much of the purchasing power parity (PPP) puzzle is due to upwardly biased estimates of persistence. According to them, the source of the bias is the existence of heterogeneous price adjustment dynamics at the sectoral level that established time series or panel data methods fail to control for. This paper re‐examines this claim in two steps. Firstly, we demonstrate that IMRR's measures of sectoral persistence are systematically downwardly biased because they are based on an inaccurate definition of the ‘average’ impulse response function (IRF). We then show that standard estimates of shock persistence are recovered after this bias is corrected. Secondly, building on the results in Mayoral (2008), which prove that aggregate and micro models induce the same shock persistence behavior, we show that estimates based on aggregate and sectoral exchange rates are, in fact, highly consistent. Thus, aggregation is not the solution to the PPP puzzle. Copyright © 2009 John Wiley & Sons, Ltd.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 19 citations exist upstream.

References

1995Estimating long-run relationships from dynamic heterogeneous panels 2006Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure 1996The Purchasing Power Parity Puzzle 2000The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?2004Some Evidence on the Importance of Sticky Prices 1980Long memory relationships and the aggregation of dynamic models 2002Some Evidence on the Importance of Sticky Prices 2002Dynamic Panel Estimation and Homogenity Testing Under Cross Section Dependence

Cited by

2012Purchasing Power Parity in Tradable Goods 2011Aggregate real exchange rate persistence through the lens of sectoral data

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.