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The Quest for Purchasing Power Parity with a Series-specific Unit Root Test Using Panel Data

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  • Breuer, Janice B.
  • McNown, Robert
  • Wallace, Myles

Abstract

A unit root testing procedure is presented that exploits the well-established power advantages of panel estimation while rectifying a deficiency in other panel unit root tests. This procedure, which takes into account contemporaneous cross-correlation and heterogeneous serial correlation of the regression residuals, allows determination of which members of the panel reject the null hypothesis of a unit root and which do not. Applying the procedure to real exchange rates yields results that are in broad agreement with those obtained from single-equation unit root tests. There is little evidence that a unit root can be rejected in dollar-based real exchange rates for the floating rate period.

Suggested Citation

  • Breuer, Janice B. & McNown, Robert & Wallace, Myles, 2000. "The Quest for Purchasing Power Parity with a Series-specific Unit Root Test Using Panel Data," Working Papers 112956, Clemson University, Center for International Trade.
    • Handle: RePEc:ags:cuciwp:112956
    DOI: 10.22004/ag.econ.112956
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    References listed on IDEAS

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    5. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles S, 2001. "Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 482-493, August.
    6. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
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    Cited by:

    1. Jaebeom Kim, 2006. "Reconsidering Real Interest Parity for Traded and Nontraded Goods," Review of International Economics, Wiley Blackwell, vol. 14(2), pages 306-315, May.

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