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Why not use standard panel unit root test for testing PPP

  • Lyhagen, Johan

    ()

    (Dept. of Economic Statistics, Stockholm School of Economics)

In this paper we show the consequences of applying a panel unit root test when testing for a purchasing power parity relationship. The distribution of the tests investigated, including the IPS test of Im et al (1997), are influenced by a common stochastic trend which is usually not accounted for. The result is that the size tends to one with the number of cross-sections.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0413.pdf
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File URL: http://swopec.hhs.se/hastef/papers/hastef0413.ps
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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 413.

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Length: 11 pages
Date of creation: 29 Nov 2000
Date of revision:
Handle: RePEc:hhs:hastef:0413
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