Searching for Coherence between Spatial and Temporal Measures of International Price Change Getachew Tessema and Peter Rossiter

Outline 1. Background 2. Research objective 3. Methodology: Rhoades' ideas 4. Data sources and issues 5. Empirical results 6. Conclusions

1. Purchasing power parities (PPPs) Often economists are interested in comparisons between countries such as: - economic activity/GDP/GDP per capita - level of poverty - productivity These comparisons require the conversions of national currencies into comparable units PPPs serve this purpose

1.1 Construction of PPPs Construction of PPPs involves SNA data in national currencies Prices of goods and services A reference country or countries Aggregation method

1.2 Construction of PPPs Construction of PPPs involves SNA data in national currencies Prices of goods and services A reference country or countries Index formulae Provided by member countries collected infrequently (every 3 years by the ECP)) Usually EU15 The EKS method

 PPPs constructed for the years where prices are directly collected are called Benchmark PPPs.  PPPs for subsequent years are extrapolated using price movements from the time-series based national accounts. 1.3 Some points to note about PPPs 1.3 Some points to note about PPPs

1.4 The problem 1.4 The problem  When extrapolated PPPs are compared with latter benchmarks there is almost always inconsistency between them.

1.5 Potential sources of inconsistency Measurement (e.g., prices) Theoretical (index formulas) Benchmark PPPs versus extrapolated PPPs Revisions to SNA (e.g., expenditure)

2. Objective  To get a better understanding of the sources of inconsistency  To measure their relative contributions  To make suggestions to improve future PPP projections

3. Methodology: Rhoades' ideas  Decomposes inconsistency into its sources  Provides an integrated framework to analyse PPP-implied and time-series based estimates systematically  Based on progressive substitution of data items from PPP system to the Time-series system (or vice versa)

3.1 Methodology: analytical framework

Consider the spatial relatives at time t and t+k:

3.1 Methodology: PPP-implied price change

3.1 Decomposing inconsistency Time series system PPP-system Time series aggregate price change PPP-implied aggregate price change Step 1. Compare Step 2. Substitute data items from PPP-system to Time series system Expenditure Re-calculate PPP-implied aggregate price change + Relative prices Re-calculate PPP-implied aggregate price change + Fisher index Re-calculate PPP-implied aggregate price change 1 2 3

3.1 Decomposing inconsistency Compare Time series system PPP-system Time series aggregate price change PPP-implied aggregate price change Step 1. Step 2. Substitute data items from PPP-system to Time series system Expenditure Re-calculate PPP-implied aggregate price change + Relative prices Re-calculate PPP-implied aggregate price change + Fisher index Re-calculate PPP-implied aggregate price change 1 2 3

4. Data used  Data for OECD countries provided by Eurostat  Three countries are selected for case study (Germany, Ireland and the United Kingdom)  Three-level of disaggregation of Domestic Final Demand (DFD)  Actual Individual Consumption (AIC)  Collective Consumption (CC)  Gross Fixed Capital Formation (GFCF)  The study covers the years

5.1 Aggregate price change – Domestic final demand, 1999– Discussion of Results % points UK GermanyIreland United Kingdom SN A IR SN A DEIRDE

5.2 Real growth – Domestic final demand, 1999–2002 % points UK GermanyIreland SN A IR SN A DEIRDE United Kingdom

5.3 Net effects on aggregate price changes, % points * indicates reference country

5.4 Net effects on aggregate price changes, % points

5.5 Net effects on aggregate price changes, % points

5.6 Net effects on aggregate price changes, % points

5.7 Net effects on real growth in DFD, % points

5.8 Net effects on real growth in DFD, % points

5.9 Net effects on real growth in DFD, % points

5.10 Sub-aggregate level effects on aggregate price change, change, % points

5.11 Sub-aggregate level expenditure effects on aggregate price, price,

6. Conclusions and recommendations 6. Conclusions and recommendations  Inconsistency is predominantly driven by price differences (based on relative prices that depend on the reference country)  Index effects can be large depending on the reference country  The issue of a reference country is important  We believe that the framework provides important insights for post-hoc analysis  There appears to be some potential to minimise inconsistency of future PPP projections  For example: 1. Extrapolate component-level PPPs using the time-series price movements, 2. Then use Fisher Index to combine these extrapolated PPPs (depending on the availability of disaggregated data)

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