TY  - JOUR
AU  - Chen,Shiu-Sheng
AU  - Engel,Charles
TI  - Does "Aggregation Bias" Explain the PPP Puzzle?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10304
PY  - 2004
Y2  - February 2004
UR  - http://www.nber.org/papers/w10304
L1  - http://www.nber.org/papers/w10304.pdf
N1  - Author contact info:
Shiu-Sheng Chen
E-Mail: sschen@ntu.edu.tw

Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu
AB  - Recently, Imbs et. al. (2002) have claimed that much of the purchasing power parity puzzle can be explained by  aggregation bias'. This paper re-examines aggregation bias. First, it clarifies the meaning of aggregation bias and its applicability to the PPP puzzle. Second, the size of the  bias' is shown to be much smaller than the simulations in Imbs et. al. (2002) suggest, if we rule out explosive roots in the simulations. Third, we show that the presence of non-persistent measurement error especially in the Imbs et. al. (2002) data   can make price series appear less persistent than they really are. Finally, it is now standard to recognize that small-sample bias plagues estimates of speeds of convergence of PPP. After correcting small sample bias by methods proposed by Kilian (1998) and by So and Shin (1999), the half-life estimates indicate that heterogeneity and aggregation bias do not help to solve the PPP puzzle.
ER  -