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Testing for Purchasing Power Parity in Cointegrated Panels

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Author Info
Pär Österholm
Mikael Carlsson
Johan Lyhagen

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Abstract

This paper applies the maximum likelihood panel cointegration method of Larsson and Lyhagen (2007) to test the strong PPP hypothesis using 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 esimators of the cointegrating vectors. Our overall results are the same across all approaches: The strong PPP hypothesis is rejected in favour of weak PPP with heterogenenous cointegrating vectors.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/287.

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Length: 19 pages
Date of creation: 20 Dec 2007
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Handle: RePEc:imf:imfwpa:07/287

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  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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