Aggregation BiasDOES Explain the PPP Puzzle

This paper addresses the criticisms of Imbs, Mumtaz, Ravn and Rey (2002) put forward by Chen and Engel (2004). We show that their con-tentions are based on: (i) analytical counter-examples which are not em-pirically relevant; (ii) simulation results minimizing the extent of "aggre-gation bias"; (iii) unfounded claims on the impact of measurement errors on our results; and (iv) problematic implementation of small-sample bias corrections. We conclude, as in our original paper, that "aggregation bias" goes a long way towards explaining the PPP puzzle. This note is an addendum to our main paper "PPP Strikes Back: Aggregation and the Real Exchange Rate " (\u85 rst draft December 2002, revised version April 2004). We than