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Purchasing Power Parity Tests in Cointegrated Panels

This paper employs recently developed techniques for testing hypotheses in cointegrated panels to test the strong version of purchasing power parity for a panel of post Bretton Woods data. We compare results using fully modifed and dynamic OLS approaches, and strongly reject the hypothesis. We also introduce a new between-dimension dynamic OLS estimator and find that the between-dimensio n FMOLS and DOLS estimates of the long-run deviation from purchasing power parity are larger than the correspondin g within-dimension estimates. Finally, we attempt to reconcile these rejections with the mixed findings that have been reported in panel unit root studies.

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File URL: http://web.williams.edu/Economics/wp/pedronipurchasing.pdf
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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2001-01.

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Length: 5 pages
Date of creation: Nov 2001
Date of revision:
Publication status: published in Review of Economics and Statistics, November 2001, v. 83, iss. 4, pp. 727-31
Handle: RePEc:wil:wileco:2001-01
Contact details of provider: Postal: Williamstown, MA 01267
Phone: 413 597 2476
Fax: 413 597 4045
Web page: http://econ.williams.edu
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  1. Wu, Yangru, 1996. "Are Real Exchange Rates Nonstationary? Evidence from a Panel-Data Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 54-63, February.
  2. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc.
  3. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  4. Menzie David Chinn, 1997. "Sectoral Productivity, Government Spending and Real Exchange Rates: Empirical Evidence for OECD Countries," NBER Working Papers 6017, National Bureau of Economic Research, Inc.
  5. Chihwa Kao & Min-Hsien Chiang, 1999. "On the Estimation and Inference of a Cointegrated Regression in Panel Data," Center for Policy Research Working Papers 2, Center for Policy Research, Maxwell School, Syracuse University.
  6. Frankel, Jeffrey A & Rose, Andrew K, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," CEPR Discussion Papers 1128, C.E.P.R. Discussion Papers.
  7. Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June.
  8. Alan M. Taylor, 1996. "International Capital Mobility in History: Purchasing-Power Parity in the Long Run," NBER Working Papers 5742, National Bureau of Economic Research, Inc.
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