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Testing for Purchasing Power Parity in Cointegrated Panels

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Author Info
Carlsson, Mikael () (Research Department)
Lyhagen, Johan () (Department of Information Science, Division of Statistics)
Österholm, Pär () (Department of Economics)

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Abstract

This paper applies the recently developed maximum-likelihood-panel cointegration method of Larsson and Lyhagen (2007) to test the strong PPP hypothesis during the recent ‡oat period on data for the G7 countries. This method is robust in several important dimensions relative to previous methods, including the well-known issue of cross-sectional dependence of error terms. The findings using this new method are contrasted to those from the Pedroni (1995) cointegration tests and fully modified OLS and dynamic OLS estimators of the cointegrating vectors. Although the shortcomings of previous methods do matter in various cases, the overall results are the same across approaches: The strong PPP hypothesis is forcefully rejected in favor of the weak PPP hypothesis with heterogeneous cointegrating vectors. As a consequence, the strong PPP hypothesis does not even seem to be an acceptable approximation of observed data.

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Publisher Info
Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2008:1.

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Length: 20 pages
Date of creation: 10 Dec 2007
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Handle: RePEc:hhs:uunewp:2008_001

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Related research
Keywords: Purchasing Power Parity; Panel Cointegration; Maximum Likelihood; Fully Modified OLS; Dynamic OLS;

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
F31 - International Economics - - International Finance - - - Foreign Exchange

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Liang, Che-Yuan, 2008. "Collective Lobbying in Politics: Theory and Empirical Evidence from Sweden," Working Paper Series 2008:2, Uppsala University, Department of Economics. [Downloadable!]
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