HOME BIAS AND PURCHASING POWER PARITY: EVIDENCE
FROM THE G-7 COUNTRIES
University of Ioannina
Bank of Greece and University of Ioannina
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 prices 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.
Keywords: PPP; Home bias; Panel data.
JEL classification: F31; C33.
Acknowledgements: The authors would like to thank H. Gibson for helpful comments and suggestions. Any remaining mistakes are our own responsibility. The views expressed in this paper are those of the authors and should not be interpreted as those of the respective institutions.
Department of Economics,
University of Ioannina,
45110 Ioannina, Greece,
Tel.: +26510 - 95942