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How Sure are we About PPP Panel Evidence with the Null of Stationary Real Exchange Rates

  • Kuo, B.-S.
  • Mikkola, A.
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    There has been serious suspicion of a spurious rejection of the unit roots in panel studies of PPP due to the failure to control cross-sectional dependence. This article presents evidence of mean-reversion in industrial country real exchange rates in a set up that accounts for cross-sectional dependence, is invariant to the benchmark currency and capable of detecting against regime changes, and actually tests for the null of interest, i.e. the purchasing power parity. Our results are based on a KPSS rest for the stationarity null generalized in multivariate random walk plus noise model by Nyblom and Harvey (1998).

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    Paper provided by Department of Economics in its series University of Helsinki, Department of Economics with number 451.

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    Length: 29 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:fth:helsec:451
    Contact details of provider: Postal: University of Helsinki; Department of Economics, P.O.Box 54 (Unioninkatu 37) FIN-00014 Helsingin Yliopisto
    Phone: +358 9 191 8897
    Fax: +358 9 191 8877
    Web page: http://www.helsinki.fi/politiikkajatalous/
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