On PPP, Unit Roots and Panels

Martin Wagner

No 176, Economics Series from Institute for Advanced Studies

Abstract: This paper re-assesses the panel (unit root test) evidence for PPP on four monthly data sets. We discuss and illustrate that commonly-used first generation panel unit root tests are inappropriate for PPP analysis since they are constructed for cross-sectionally uncorrelated panels. Given that real exchange rate panel data sets are – almost by construction – highly cross-sectionally correlated, so called second generation panel unit root methods that allow for and model cross-sectional dependence should be applied. Using inappropriate first generation tests, quite strong evidence for PPP is found. However, this evidence vanishes entirely when resorting to an appropriate method (e.g. the one developed in Bai and Ng, 2004a) for nonstationary cross-sectionally correlated panels. We strongly believe that our findings are relevant beyond the data sets investigated here for illustration.

Keywords: PPP; Real exchange rate index; Unit root; Panel; Cross-sectional dependence; Factor model (search for similar items in EconPapers)
JEL-codes: C23 F30 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk and nep-ifn
Date: 2005-09
View list of references View citations in EconPapers

Downloads: (external link)
http://www.ihs.ac.at/publications/eco/es-176.pdf First version, 2005 (application/pdf)

Related works:
Journal Article: On PPP, unit roots and panels (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ihs:ihsesp:176

Ordering information: This working paper can be ordered from
Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria

Access Statistics for this paper

More papers in Economics Series from Institute for Advanced Studies
Address: Stumpergasse 56, A-1060 Vienna, Austria
Contact information at EDIRC.
Series data maintained by Wolfgang Nessler ().