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    Pairwise tests of purchasing power parity using aggregate and disaggregate price measures

    Pesaran, M.H. and Smith, Ron and Yamagata, T. and Hvozdyk, L. (2006) Pairwise tests of purchasing power parity using aggregate and disaggregate price measures. Working Paper. Cambridge University, Cambridge, UK.

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    Abstract

    In this paper we adopt a new approach to testing for purchasing power parity, PPP, that is robust to base country effects, cross-section dependence, and aggregation. We test for PPP applying a pairwise approach to the disaggregated data set recently analysed by Imbs, Mumtaz, Ravan and Rey (2005, QJE). We consider a variety of tests applied to all 66 possible pairs of real exchange rate among the 12 countries and estimate the proportion of the pairs that are stationary, for the aggregates and each of the 19 commodity groups. To deal with small sample problems, we use a factor augmented sieve bootstrap approach and present bootstrap pairwise estimates of the proportions that are stationary. The bootstrapped rejection frequencies at 26%-49% based on unit root tests suggest some evidence in favour of the PPP in the case of the disaggregate data as compared to 6%-14% based on aggregate price series.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: Cambridge Working Papers in Economics, number 0634
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Sarah Hall
    Date Deposited: 27 Oct 2020 15:49
    Last Modified: 27 Oct 2020 15:49
    URI: https://eprints.bbk.ac.uk/id/eprint/41076

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