NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

"Aggregation Bias" DOES Explain the PPP Puzzle

Jean Imbs, Haroon Mumtaz, Morten O. Ravn, Hélène Rey

NBER Working Paper No. 11607
Issued in September 2005
NBER Program(s):   IFM

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.

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Document Object Identifier (DOI): 10.3386/w11607

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