Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/153967 
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper No. 1534
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper studies the influence of aggregating across space when (i) testing the PPP theory or more generally pair-wise cointegration and (ii) evaluating the PPP puzzle. Our contribution is threefold: we show that aggregating foreign data and applying an ADF test may lead to erroneously reject the PPP hypothesis. We then show, on the basis of theoretical arguments as well as Monte Carlo experiments, that a sizable bias in the estimates of half-life deviations to PPP may be due to the effect of aggregation across space. We finally illustrate empirically the importance of spatial considerations when estimating the speed of price convergence among euro area countries.
Subjects: 
aggregation across space
cointegration
Half-life estimates
PPP
price convergence
JEL: 
C23
F41
Document Type: 
Working Paper

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