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Testing for Purchasing Power Parity in Cointegrated Panels

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  • Johan Lyhagen
  • Pär Österholm
  • Mikael Carlsson

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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Bibliographic Info

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

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Length: 19
Date of creation: 01 Dec 2007
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Handle: RePEc:imf:imfwpa:07/287

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Keywords: Purchasing power parity; cointegration; ppp; statistics; econometrics; equation; logarithm; bootstrap; measurement errors; time series; standard errors; correlation; constant term; standard error; asymptotic distribution; finite sample; statistical analysis; parameter value; linear regression; equations; normal distribution; pooled time series; statistic;

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References

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  1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 159-178.
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Cited by:
  1. Ritesh Kumar Mishra & Sanjay Sehgal, 2011. "Exchange rates and prices in purchasing power parity framework: Are bilateral real exchange rates stationary?," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 4(3), pages 274-286.

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