Border region panel evidence on PPP deviations

This article examines prices for 32 identical menu items sold by restaurant franchises operating on both sides of the border between El Paso in the US and Ciudad Juárez in Mexico from July 1997 to June 2008. The relationship between Real Exchange Rate (RER) volatility and the degree of price convergence is examined within a panel data context. The city-pair and goods selected provide a unique experiment in which distance, tradability and industry considerations are set aside and the extent of RER volatility is the only factor to influence price convergence. We find nonmonotonic relationships between mean reversion and RER volatility: very fast adjustments for both low and high volatility panels of goods (between 1 and 2 months) and slower half-lives (between 3 and 4 months) at moderate levels of uncertainty. These figures are, however, substantially smaller than the 6 or 7 months reported in previous research for general US–Mexico goods, suggesting the very strong price convergence observed along the US–Mexican border.     

Aggregation in macroeconomic models: an empirical input–output approach

The aggregation level of industries in the Danish macroeconomic model ADAM is examined using a new indicator of aggregation bias. The indicator is decomposed into contributions from the original industries, thereby clearly identifying the aggregation problems which caused the six industry groups of the older versions of ADAM to be disaggregated into the current 19 groups. An aggregation key minimizing the new bias indicator is found: from the microlevel of 64 industries, 18 ‘optimal’ industry groups are formed through ‘clustering’; these groups are very similar to the current ADAM groups. Altogether, the conclusions based on the new indicator closely resemble those reached through years of practical experience.     

Aggregated and disaggregated import demand in China: An empirical study

This paper re-estimates both the aggregated and disaggregated import demand functions for China. We consider six groups of goods for the disaggregated imports based on the Standard International Trade Classification (SITC). The empirical findings from the dynamic ordinary least squares and autoregressive distributed lag regressions indicate that there are positive effects of the domestic income on imports. Second, contrary to theory but in line with previous studies, we obtain negative coefficients for the real effective exchange rate—a real appreciation in the Renminbi (RMB) would reduce import demand. Third, the period of the great global recession is negatively associated with the import demand in China. Fourth, the perception of tail risk negatively affects demand for the aggregated imports and five of six groups for the disaggregated imports. Fifth, the exchange rate reform had a positive impact on the aggregated imports, but our estimations report mixed results for the disaggregated imports. Finally, our results indicate that there is no aggregation bias for import demand in China.     

DOES ‘AGGREGATION BIAS’ EXPLAIN THE PPP PUZZLE?

Abstract. Recently, Jean Imbs and colleagues have claimed that much of the purchasing power parity puzzle can be explained by ‘aggregation bias’. This paper re‐examines aggregation bias. It clarifies the meaning of aggregation bias and its applicability to the PPP puzzle; demonstrates that the size of the ‘bias’ is much smaller than suggested if explosive roots in the simulations are ruled out; and shows that the presence of non‐persistent measurement error data can make price series appear less persistent than they are. After correcting for small‐sample bias, half‐life estimates indicate that heterogeneity and aggregation bias do not help to solve the PPP puzzle.     

Scale effects,time-varying markups,and the cyclical behaviour of primal and dual productivity

This paper presents estimates of the degree of returns to scale using nonparametric measures of primal and dual productivity for 2-digit US manufacturing industries. As part of the analysis, the cyclical behaviour of primal and dual productivity measures are considered, time-varying markups are allowed for, and the small sample properties of the instrumental variables estimator used to derive the estimates from the primal and dual relations examined. Both the primal and dual estimates indicate the existence of increasing returns to scale for the durable goods industries. The simulation results indicate there is a slight tendency for the dual equation estimates to overestimate the degree of returns to scale. However, small sample bias appears to be most severe for the non-durable goods industries.     

Structural breaks and relative price convergence among US cities

This paper examines whether inclusion of structural breaks helps resolve the puzzling result of excessively slow speed of convergence in relative prices across US cities while using long time series data on CPI. With an endogenously determined single break in 1985 in annual CPI data for 17 major US cities between 1918 and 2010, the panel unit root test results provide overwhelming evidence of convergence of relative prices across cities, which is consistent with the existing literature. Most importantly, this study finds that the speed of convergence with structural break is faster than that reported by previous panel studies with no structural break that use similar long time series data. Furthermore, correcting for small-sample bias (the so-called “Nickell Bias”) and time aggregation bias generates a half-life of 3.9 years, which is 64% shorter than the half-life estimate with no structural break and no bias correction. The breakpoint in 1985 coincides with the beginning of the period of Great Moderation during which inflation, along with other macro variables, has become more stable and its impact on relative prices across US cities seems to have waned.     

An empirical examination of long-run purchasing power parity as theory of international commodity arbitrage

An empirical analysis of long-run purchasing power parity (PPP) as a theory of international commodity arbitrage between UK and US prices and the sterling/US dollar exchange rate for the period 1975–1980 is presented. Econometric techniques concerning the cointegration of economic time series are applied to a sample of 35 manufactured commodities which in 1977 constituted approximately a quarter of the net output of all manufacturing industry in Great Britain. Our results are extremely unfavourable to the PPP hypothesis as a stable long-run proportionality between exchange rates and disaggregated prices.     

Purchasing power parity and the role of traded goods: evidence from EU states

In this paper the debate on purchasing power parity (PPP) is considered by providing results with disaggregated price data from European countries. The disaggregation of the price data is important because it allows for the consideration of goods that are likely tradable (e.g., fruits) with goods that are not tradable (e.g., hotel rooms). The European focus is important because these results are able to shed light on the effect of the type of exchange rate regime, member of exchange rate mechanism (ERM) or not.     

Product variety and technical change

Motivated by growth models based on the variety of capital goods, recent empirical studies have established links between productivity and several trade-based measures of product variety, carrying the implication that these measures may represent technology. We study this implication by explicitly proposing the variety of capital goods available for production as a direct measure of the state of technology. Within a simple growth and development framework, we derive a ‘conditional technological convergence’ hypothesis on how this variety should behave if it were indeed to represent the state of technology. The hypothesis is tested with highly disaggregated trade data, using tools from the income convergence literature. The results suggest that a trade-based count measure of the variety of available capital goods, allowing for product differentiation by country of origin, indeed behaves ‘as if’ it represented technology when change of technology is understood as a learning process, and that there is conditional technological convergence among our panel of mainly OECD and transition economies.     

Ein Entscheidungsmodell für Konsumieren und Sparen

Summary The present study analyses the simultaneous problem of consumption and saving by means of a consistent demand system; for this purpose the linear—expenditure—system (LES), developed by R. Stone, has been modified and used as a methodological base. Saving takes, for the sake of operationality, the character of a consumer—good and becomes an argument of the utility function. The usual neoclassical assumption of utility maximization allows the derivation of a linear expenditure system of consumption and saving (LESSC) when prices and income are given. The simultaneous LESSC-model has remarkable weaknesses, however: the assumption of certainty, the static character of the model, the disregard for major savings—motives and private expenditure on homebuiding led to bad elasticity—estimates. The assumpion of directly—additive utility functions causes furthermore collinearity between income—and price—elasticities such that the meaning of the derived elasticities is greatly reduced.The income—elasticities derived from the LESSC are positive throughout but show a remarkable variance. The calculation of the Friedman—bias demonstrates a rather strong bias due to the assumption of certainty. A modification resulted in income—elasticities of private consumption and savings of around 0,93 (unmodified: 0,88) and 1,41 (unmodified: 1,76). The demand for consumption goods of great necessity was income—inelastic whereas the demand for goods of less importance to survival was income—elastic. An analysis of income—elasticities of the disaggregated system and the relation between transitory components of consumption and income existing in Austria gave the impression that unexpected changes in income are not only reflected in saving but also in changes of the consumption—structure.The respective price—elasticites are all negative and smaller than 1. For less important consumption—goods lower price—elasticities have been measured and for easily substitutable goods higher ones. Marked crossprice—elasticities could only by discovered with clothing and food products. Generally it can be said that an increase in prices of goods of the daily needs hits both the expenditure on easily substitutable consumption goods and causes dissaving.A comparison with the elasticities calculated through OLS shows a greater reliance of LESSC—elasticities as far as data of differing aggregation levels are concerned.

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Mécanique Sociale may one day take her place along with Mécanique Celeste throned each upon the double—sided height of one maximum principle, the supreme pinnacle of moral as of physical science.     

Purchasing power parity and uncovered interest parity: The Spanish case

This paper examines whether the purchasing power parity (PPP) hypothesis holds in the long run when traded and non-traded goods are distinguished. Moreover, this hypothesis is analyzed jointly with the uncovered interest parity (UIP). The period from January 1986 to December 1995 was studied using monthly data corresponding to the consumer price index, short- and long-term interest rates, and spot exchange rates for Portugal, France, Italy, Germany, and Great Britain with each relative to Spain. Using Johansen's multi-equational cointegration technique, it was found that PPP does not hold even with the explicit consideration of the distinction between traded and non-traded goods as well as the difference between domestic and foreign interest rates. Furthermore, these two factors generate a systematic deviation between exchange rates and PPP.     

Home bias, distribution services and determinants of real exchange rates

This paper examines empirically how exogenous changes in the terms of trade affect the real exchange rate through the relative price of traded goods with Canada–US data. The relative price of traded goods is constructed using prices at the dock and retail prices. The first measure emphasizes the importance of home bias in consumption of traded goods. The second measure highlights the importance of distribution services required for consumption of traded goods. It is found that terms of trade shocks affect the relative price of traded goods using both measures. A possible interpretation of empirical findings is that home bias and distribution services are important for understanding the relative price of traded goods.     

The Behaviour of Real Exchange Rates: The Case of Japan

This study examines the convergence rate of mean reversion by estimating the half‐lives of sectoral real exchange rates using an extensive product price panel for Japan (with the USA as the numéraire). We find that the half‐lives of sectoral real exchange rates are remarkably distorted when the grouped half‐life is measured inappropriately and the cross‐sectional dependence and potential trend breaks are ignored. After taking account of these problems, the bias‐corrected half‐life for all goods is as low as 3.00 years, close to the bottom of the consensus view of 3 to 5 years. Moreover, the bias‐corrected half‐life of mean reversion is 2.40 years for traded goods, and only approximately half that for non‐traded goods. Finally, our findings also support the view that small‐sample bias correction is critical for half‐life estimations.     

Does exchange-rate uncertainty matter in the Malaysia–E.U. bilateral trade? An industry level investigation

Due to ambiguity in the past literature, researchers have examined exchange rate volatility effect on trade using disaggregated data in recent years. Previous research has focused more on aggregated data having aggregation bias which has led to unnecessarily over-generalized findings. This study investigates the impact of exchange rate volatility on the Malaysian bilateral trade flows with European Union using industry level data. Our empirical findings, based on auto-regressive distributed lag framework, suggest that many import and export industries experience exchange rate volatility influence in the short run, while a very small number of industries show this effect in the long run. Moreover, the adverse impact of financial crisis (2007–2008) is more prevalent on import industries compared to export industries.     

The J-curve: evidence from commodity trade between US and China

In testing the short-run (J-curve effect) and the long-run effects of currency depreciation on the trade balance many researchers have used either trade data between one country and the rest of the world or between one country and another trading partner. Both groups are said to suffer from aggregation bias. To reduce the bias, in this article we consider trade data between one country (the US) and her trading partner (China) disaggregated by commodity. We use imports and exports of 88 industries (2-digit and 3-digit classifications) and cointegration analysis to show that the trade balance of at least 34 of the industries react favourably to real depreciation of the dollar. The J-curve effect is detected in 22 industries. Furthermore, most of these industries that are sensitive to currency depreciation are durable commodity groupings.     

Generalized least squares and maximum likelihood estimation of the logistic function for technology diffusion

Given a simple stochastic model of technology adoption, we derive a function for technological diffusion that is logistic in the deterministic part and has an error term based on the binomial distribution. We derive two estimators—a generalized least squares (GLS) estimator and a maximum likelihood (ML) estimator—which should be more efficient than the ordinary least squares (OLS) estimators typically used to estimate technological diffusion functions. We compare the two new estimators with OLS using Monte-Carlo techniques and find that under perfect specification, GLS and ML are equally efficient and both are more efficient than OLS. There was no evidence of bias in any of the estimators. We used the estimators on some example data and found evidence suggesting that under conditions of misspecification, the estimated variance-covariance of the ML estimator is badly biased. We verified the existence of the bias with a second Monte-Carlo experiment performed with a known misspecification. In the second experiment, GLS was the most efficient estimator, followed by ML, and OLS was least efficient. We conclude that the GLS estimator of choice.     

Home bias and the persistence of real exchange rates

This paper investigates the half-life of real exchange rates after taking into account the impact of home bias. Empirical results indicate that the half-life of real exchange rates is in the range of 1.5 to 2 years for four out of five countries after controlling the impact of home bias. These results support Obstfeld and Rogoff's (2000, NBER Macroeconomics Annual) view that home bias is crucial in explaining the PPP puzzle.     

Purchasing power parity and country characteristics: Evidence from panel data tests

We examine long-run purchasing power parity (PPP) using panel data methods to test for unit roots in US dollar real exchange rates of 84 countries. We find stronger evidence of PPP in countries more open to trade, closer to the United States, with lower inflation and moderate nominal exchange rate volatility, and with similar economic growth rates as the United States. We also show that PPP holds for panels of European and Latin American countries, but not for African and Asian countries. Our findings demonstrate that country characteristics can help explain both adherence to and deviations from long-run PPP.     

Half-lives of Deviations from PPP: Contrasting Traded and Nontraded Components of Consumption Baskets

The paper examines the convergence question by contrasting the half‐lives of deviations from purchasing power parity (PPP) across traded and nontraded goods in an exchange rate model with sticky prices. In particular, empirical results show that in most cases the half‐lives of PPP deviations for traded goods are shorter than those for total consumption and for nontraded goods.     

What Do We Know About Long–run Equilibrium Real Exchange Rates? PPPs vs Macroeconomic Approaches

Despite the fact that the presence of non tradable goods is one of the most frequently advanced reasons for the failure of PPP, the empirical analysis conducted in this paper shows that it explains only a very small portion of the long run behaviour of real exchange rates (RERs) in developed countries: in most cases, there appears to be a very strong long run relationship between RERs calculated on price indexes for tradables and non tradables. As a consequence, deviations from PPP usually appear to be as large for both kinds of goods. To a certain extent, this stylised fact is also verified in the case of the yen/dollar RER, yet formerly known as a typical illustration of the so–called Balassa–Samuelson effect. In this context, so–called macroeconomic approaches of ERERs may be viewed as an alternative to all versions of PPP. We develop a model which combines the contributions of the most fruitful dynamic approaches, namely the NATREX and the BEER. An estimate of this model shows that the main long run determinants of the dollar/euro RER are the rate of consumption and the level of technical progress of the euro area relative to the US.