A modified LLC panel unit root test of the PPP hypothesis

Joakim Westerlund and Johan Blomquist

Empirical Economics, 2013, vol. 44, issue 2, 833-860

Abstract: In a recent study, Westerlund (Empir Econ 37:517–531, 2009 ) shows that the performance of the popular LLC (Levin et al., J Econ 108:1–24, 2002 ) panel unit root test depends critically on the choice of lag truncation used when correcting for serial correlation, and that it is only when this parameter is set as a function of time that the power raises above size. The purpose of the current paper is to propose a modified test that does not suffer from this drawback. The new test is not only simpler to compute but also superior in terms of small-sample performance, which is illustrated using an example purchasing power parity for less developed countries. Copyright Springer-Verlag 2013

Keywords: Non-stationary panel data; Panel unit root test; Purchasing power parity; Cross-section dependence (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s00181-012-0552-x

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Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

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