Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/72291
Authors: 
Wagner, Martin
Year of Publication: 
2005
Series/Report no.: 
Reihe Ökonomie / Economics Series, Institut für Höhere Studien (IHS) 176
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.
Subjects: 
PPP
real exchange rate index
unit root
panel
cross-sectional dependence
factor model
JEL: 
C23
F30
F31
Document Type: 
Working Paper

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