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A modified LLC panel unit root test of the PPP hypothesis

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Author Info

  • Joakim Westerlund

    ()

  • Johan Blomquist

Abstract

In a recent study, Westerlund (Empir Econ 37:517–531, 2009 ) shows that the performance of the popular LLC (Levin et al., J Econ 108:1–24, 2002 ) panel unit root test depends critically on the choice of lag truncation used when correcting for serial correlation, and that it is only when this parameter is set as a function of time that the power raises above size. The purpose of the current paper is to propose a modified test that does not suffer from this drawback. The new test is not only simpler to compute but also superior in terms of small-sample performance, which is illustrated using an example purchasing power parity for less developed countries. Copyright Springer-Verlag 2013

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File URL: http://hdl.handle.net/10.1007/s00181-012-0552-x
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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 44 (2013)
Issue (Month): 2 (April)
Pages: 833-860

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Handle: RePEc:spr:empeco:v:44:y:2013:i:2:p:833-860

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Related research

Keywords: Non-stationary panel data; Panel unit root test; Purchasing power parity; Cross-section dependence;

References

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Cited by:
  1. Joakim Westerlund, . "Pooled Panel Unit Root Tests and the Effect of Past Initialization," Financial Econometics Series 2014_06, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.

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