Index-Induced Errors and Purchasing Power Parity: Bounding the Possible Bias

JOURNAL OF INTERNATIONAL FINANCIAL MARKETS, INSTITUTIONS & MONEY, Vol 5 (2/3) 1995

Posted: 24 Aug 1998

See all articles by Sandra Betton

Sandra Betton

Concordia University, Quebec - Department of Finance

Maurice D. Levi

University of British Columbia (UBC) - Sauder School of Business

Raman Uppal

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Abstract

With different countries' price indexes being abased on different baskets of goods, measures of inflation-differentials and price-level ratios are intrinsically subject to error. These measurement errors could bias the outcome of PPP tests which include price indexes as regressors. We apply two-way regressions to gauge whether such index-induced errors are potentially relevant. The two-way regression approach suggests the errors from inflation measurement may be very large. It also suggests that even if the measurement errors could be overcome, exchange rates behave very differently than predicted by PPP.

JEL Classification: G10

Suggested Citation

Betton, Sandra and Levi, Maurice David and Uppal, Raman, Index-Induced Errors and Purchasing Power Parity: Bounding the Possible Bias. JOURNAL OF INTERNATIONAL FINANCIAL MARKETS, INSTITUTIONS & MONEY, Vol 5 (2/3) 1995. Available at SSRN: https://ssrn.com/abstract=6746

Sandra Betton

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada
514-848-2783 (Phone)
514-848-4500 (Fax)

Maurice David Levi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Henry Angus 865
Vancouver BC V6T 1Z2
Canada
604-822-8260 (Phone)
604-822-8521 (Fax)

Raman Uppal (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

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