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Why not use standard panel unit root test for testing PPP

Author

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  • Johan Lyhagen

    (Department of Information Science, Uppsala University)

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.

Suggested Citation

  • Johan Lyhagen, 2008. "Why not use standard panel unit root test for testing PPP," Economics Bulletin, AccessEcon, vol. 3(26), pages 1-11.
    • Handle: RePEc:ebl:ecbull:eb-07c20098
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    References listed on IDEAS

    as
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    9. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2005. "Testing for PPP: Should we use panel methods?," Empirical Economics, Springer, vol. 30(1), pages 77-91, January.
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    Cited by:

    1. Mauro Costantini & Claudio Lupi, 2013. "A Simple Panel-CADF Test for Unit Roots," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(2), pages 276-296, April.
    2. Robert Czudaj & Joscha Beckmann, 2012. "Spot and futures commodity markets and the unbiasedness hypothesis - evidence from a novel panel unit root test," Economics Bulletin, AccessEcon, vol. 32(2), pages 1695-1707.
    3. Bajo-Rubio, Oscar & Ramos-Herrera, María del Carmen, 2023. "Does international trade promote economic growth? Europe, 19th and 20th centuries," GLO Discussion Paper Series 1358, Global Labor Organization (GLO).

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    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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