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Why not use standard panel unit root test for testing PPP

Author

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  • Lyhagen, Johan

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

Abstract

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.

Suggested Citation

  • Lyhagen, Johan, 2000. "Why not use standard panel unit root test for testing PPP," SSE/EFI Working Paper Series in Economics and Finance 413, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0413
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    More about this item

    Keywords

    Dynamic panels; Monte Carlo; Purchasing power parity;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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