Panel data tests of PPP: a critical overview

Guglielmo Maria Caporale and Mario Cerrato

Applied Financial Economics, 2006, vol. 16, issue 1-2, 73-91

Abstract: This study reviews recent developments in the analysis of non-stationary panels, focusing on empirical applications of panel unit root and cointegration tests in the context of PPP. It highlights various drawbacks of existing methods. First, unit root tests suffer from severe size distortions in the presence of negative moving average errors. Second, the common demeaning procedure to correct for the bias resulting from homogeneous cross-sectional dependence is not effective; more worryingly, it introduces cross-correlation when it is not already present. Third, standard corrections for the case of heterogeneous cross-sectional dependence do not generally produce consistent estimators. Fourth, if there is between-group correlation in the innovations, the SURE estimator is affected by similar problems to FGLS methods, and does not necessarily outperform OLS. Finally, cointegration between different groups in the panel could also be a source of size distortions. Some empirical guidelines are offered to deal with these problems, but the study concludes that panel methods are unlikely to solve the PPP puzzle.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603100500389143 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: PANEL DATA TESTS OF PPP: A CRITICAL OVERVIEW (2004)
Working Paper: PANEL DATA TESTS OF PPP: A CRITICAL OVERVIEW (2004)
Working Paper: Panel Data Tests of PPP. A Critical Overview (2004)
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: https://EconPapers.repec.org/RePEc:taf:apfiec:v:16:y:2006:i:1-2:p:73-91

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603100500389143

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().