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Is Purchasing Power Parity Overvalued?

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  • Wu, Jyh-Lin
  • Wu, Shaowen
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    Abstract

    The purpose of this paper is to re-examine the hypothesis of long-run Purchasing Power Parity among industrial countries under the current float using the panel data approach. We propose a new finite-sample panel data unit-root test procedure that allows for a general serial correlation structure and arbitrary contemporaneous correlation in model innovations across countries. This procedure is then applied to the recently developed panel data unit-root tests of Im, Pesaran and Shin (1996) and of Maddala and Wu (1999). The test results show sufficient evidence against the unit-root null for most samples. By comparing our results with the existing ones in the literature, we found that the method of assuming a restrictive serial correlation structure tends to weaken evidence against the unit-root null.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 33 (2001)
    Issue (Month): 3 (August)
    Pages: 804-12

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    Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:3:p:804-12

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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