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Testing for PPP in the Mean-Group Panel Regression Framework: Further Evidence

  • Noman, Abdullah

The paper investigates the validity of PPP by using 15 OECD countries data of monthly frequency from 1980:01 to 2005:12 and tests for the symmetry and proportionality hypotheses. The test for PPP is conducted in the framework of the General Relative PPP (RPPP) as proposed by Coakley et al. (2005) using the Mean-Group (MG) estimators of Pesaran and Smith (1995). We apply two variants of the MG estimators, namely MG and CMG, where the latter takes into account the problem of cross-sectional dependence (CSD). The symmetry null is unequivocally accepted for both estimators in CPI as well as PPI panels. The proportionality null, however, is rejected in the CPI panel with MG procedure but accepted with CMG. In the PPI panel, the MG estimate cannot reject the null while the CMG estimate marginally rejects it. Our findings are only partially supportive of the general RPPP.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7825.

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Date of creation: 17 Mar 2008
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Handle: RePEc:pra:mprapa:7825
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  2. M. Hashem Pesaran, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," CESifo Working Paper Series 1229, CESifo Group Munich.
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  4. Jerry Coakley & Stuart Snaith, 2006. "Testing for symmetry and proportionality in a European panel," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 63-71.
  5. Jörg Breitung & Bertrand Candelon, 2005. "Purchasing Power Parity during Currency Crises: A Panel Unit Root Test under Structural Breaks," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 124-140, April.
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  24. Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2004. "Unobserved Heterogeneity in Panel Time Series Models," Birkbeck Working Papers in Economics and Finance 0403, Birkbeck, Department of Economics, Mathematics & Statistics.
  25. Coakley, Jerry & Flood, Robert P. & Fuertes, Ana M. & Taylor, Mark P., 2005. "Purchasing power parity and the theory of general relativity: the first tests," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 293-316, March.
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