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How Sure are we About PPP Panel Evidence with the Null of Stationary Real Exchange Rates

B.-S. Kuo and A. Mikkola

University of Helsinki, Department of Economics from Department of Economics

Abstract: There has been serious suspicion of a spurious rejection of the unit roots in panel studies of PPP due to the failure to control cross-sectional dependence. This article presents evidence of mean-reversion in industrial country real exchange rates in a set up that accounts for cross-sectional dependence, is invariant to the benchmark currency and capable of detecting against regime changes, and actually tests for the null of interest, i.e. the purchasing power parity. Our results are based on a KPSS rest for the stationarity null generalized in multivariate random walk plus noise model by Nyblom and Harvey (1998).

Keywords: EXCHANGE RATE; TIME SERIES; ECONOMETRIC MODELS (search for similar items in EconPapers)
JEL-codes: C22 C52 F31 F47 (search for similar items in EconPapers)
Pages: 29 pages
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:fth:helsec:451

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