State of the Art Unit Root Tests and the PPP Puzzle
AbstractUsing median-unbiased estimation, recent research has questioned the validity of Rogoff’s “remarkable consensus” of 3-5 year half-lives of deviations from PPP. These estimates, however, are based on unit root tests with low power. We extend median-unbiased estimation to the efficient unit root test of Elliott, Rothenberg, and Stock (1996). We find that median-unbiased estimation based on the more powerful unit root test has the potential to tighten confidence intervals for half- lives. Using long horizon real exchange rate data, we find that the typical lower bound of the confidence intervals for median-unbiased half-lives is above 3 years. Thus, while previous confidence intervals for half-lives are consistent with virtually anything, our tighter confidence intervals now rule out economic models with nominal rigidities as candidates for explaining the observed behavior of real exchange rates. Therefore, while we obtain more information using efficient unit root tests on longer term data, this information moves us away from solving the PPP puzzle.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0310009.
Length: 27 pages
Date of creation: 08 Oct 2003
Date of revision:
Note: Type of Document - Acrobat PDF; prepared on PC; to print on A4; pages: 27 ; figures: included
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PPP Unit root test Median-unbiased DF-GLS test;
Other versions of this item:
- 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.
- Claude Lopez & Christian J. Murray & David H. Papell, 2004. "State of the Art Unit Root Tests and Purchasing Power Parity," University of Cincinnati, Economics Working Papers Series 2004-04, University of Cincinnati, Department of Economics.
- F3 - International Economics - - International Finance
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-10-12 (All new papers)
- NEP-ECM-2003-10-12 (Econometrics)
- NEP-ETS-2003-10-12 (Econometric Time Series)
- NEP-IFN-2003-10-12 (International Finance)
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.:
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