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Testing for Purchasing Power Parity in Cointegrated Panels

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  • Johan Lyhagen
  • Pär Österholm
  • Mikael Carlsson

Abstract

This paper applies the maximum likelihood panel cointegration method of Larsson and Lyhagen (2007) to test the strong PPP hypothesis using data for the G7 countries. This method is robust in several important dimensions relative to previous methods, including the well-known issue of cross-sectional dependence of error terms. The findings using this new method are contrasted to those from the Pedroni (1995) cointegration tests and fully modified OLS and dynamic OLS esimators of the cointegrating vectors. Our overall results are the same across all approaches: The strong PPP hypothesis is rejected in favour of weak PPP with heterogenenous cointegrating vectors.

Suggested Citation

  • Johan Lyhagen & Pär Österholm & Mikael Carlsson, 2007. "Testing for Purchasing Power Parity in Cointegrated Panels," IMF Working Papers 2007/287, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2007/287
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    Cited by:

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    2. Ritesh Kumar Mishra & Sanjay Sehgal, 2011. "Exchange rates and prices in purchasing power parity framework: Are bilateral real exchange rates stationary?," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 4(3), pages 274-286.
    3. López, Ramón & Sepúlveda, Kevin A., 2022. "The effects of domestic demand shocks on inflation in a small open economy: Chile in the period 2000–2021," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.

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    More about this item

    Keywords

    WP; integrating vector;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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