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Home bias and purchasing power parity: evidence from the G-7 countries

✍ Scribed by Nikolaos Mylonidis; Dimitrios Sideris

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
89 KB
Volume
13
Category
Article
ISSN
1076-9307

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✦ Synopsis

Abstract

Recent studies in the international economics literature emphasize the role of home bias in explaining a number of empirical puzzles. In the present study, we test for the following hypotheses: (i) that a home bias effect, which is nevertheless falling over time as traded goods markets become more integrated and consumption preferences become more similar across developed countries, influences the relationship among nominal exchange rates, domestic and foreign prices, and (ii) that incorporation of the home bias effect in the empirical specification of PPP enhances the robustness of the theory. We perform a panel data analysis using quarterly observations for the G‐7 economies in the post‐Bretton Woods era. The results confirm our hypotheses. Copyright © 2007 John Wiley & Sons, Ltd.

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