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Cointegration tests of purchasing power parity

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Author Info
Wallace, Frederick

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Abstract

In recent work Im, Lee, and Enders (2006) use stationary instrumental variables to test for cointegrating relationships. The advantage of their approach is that the t-statistics are asymptotically standard normal and the familiar critical values of the normal distribution may be used to assess significance. Thus, the test avoids the nuisance parameter problem in single equation regressions for cointegration. Using an updated version of the data set developed by Taylor (2002), the ILE test is compared to three single equation alternatives in testing for purchasing power parity: An error correction model, autoregressive distributed lag model, and the Engle-Granger two step procedure. The regressions with instruments provide evidence supportive of PPP for some countries but the empirical results differ across tests and the choice of instrument can affect the results.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18079.

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Date of creation: 01 Oct 2009
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Handle: RePEc:pra:mprapa:18079

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Related research
Keywords: Cointegration; purchasing power parity;

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Find related papers by JEL classification:
C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange

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  1. Taylor, Alan M & Taylor, Mark P, 2004. "The Purchasing Power Parity Debate," CEPR Discussion Papers 4495, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Pesavento, Elena, 2004. "Analytical evaluation of the power of tests for the absence of cointegration," Journal of Econometrics, Elsevier, vol. 122(2), pages 349-384, October. [Downloadable!] (restricted)
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  3. Wallace, Frederick H. & Shelley, Gary L., 2006. "An alternative test of purchasing power parity," Economics Letters, Elsevier, vol. 92(2), pages 177-183, August. [Downloadable!] (restricted)
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  4. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  5. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  6. Lopez, Claude & Murray, Christian J & Papell, David H, 2005. "State of the Art Unit Root Tests and Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 361-69, April.
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  7. Elena Pesavento, 2007. "Residuals-based tests for the null of no-cointegration: an Analytical comparison," Journal of Time Series Analysis, Blackwell Publishing, vol. 28(1), pages 111-137, 01. [Downloadable!] (restricted)
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