Purchasing Power Parity For Developing And Developed Countries. What Can We Learn From Non‐Stationary Panel Data Models?

The aim of this paper is to apply recently developed panel cointegration techniques proposed by Pedroni (Oxford Bulletin of Economics and Statistics 61 (1999): Supplement, 653–670; Econometric Theory 20 (2004): 597–625) and generalized by Banerjee and Carrion‐i‐Silvestre (Working Paper 591, European Central Bank, February 2006) to examine the robustness of the PPP concept for a sample of 80 developed and developing countries. We find that strong PPP is verified for OECD countries and weak PPP for Middle East and North African countries. However, in African, Asian, Latin American and Central and Eastern European countries, PPP does not seem relevant to characterize the long‐run behavior of the real exchange rate. Further investigations indicate that the nature of the exchange rate regime does not condition the validity of PPP, which is more easily accepted in countries with high rather than low inflation.