Why not use standard panel unit root test for testing PPP

Johan Lyhagen ()
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Johan Lyhagen: Department of Information Science, Uppsala University

Economics Bulletin, 2008, vol. 3, issue 26, pages 1-11

Abstract: In this paper we show the consequences of applying a panel unit root test that assumes independence between the cross-sections when testing for a purchasing power parity relationship. The distribution of the tests investigated, including the IPS test of Im et al (2003), are influenced by a common stochastic trend which is usually not accounted for. The result is that the empirical size tends to one with the number of cross-sections. Hence, it is of crucial importance to account for this cross-sectional dependency.

JEL-codes: C2 C3 (search for similar items in EconPapers)
Date: 2008-05-14
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