Testing for Purchasing Power Parity in Cointegrated Panels

Author/Editor:

Johan Lyhagen ; Pär Österholm ; Mikael Carlsson

Publication Date:

December 1, 2007

Electronic Access:

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Summary:

This paper applies the maximum likelihood panel cointegration method of Larsson and Lyhagen (2007) to test the strong PPP hypothesis using data for the G7 countries. This method is robust in several important dimensions relative to previous methods, including the well-known issue of cross-sectional dependence of error terms. The findings using this new method are contrasted to those from the Pedroni (1995) cointegration tests and fully modified OLS and dynamic OLS esimators of the cointegrating vectors. Our overall results are the same across all approaches: The strong PPP hypothesis is rejected in favour of weak PPP with heterogenenous cointegrating vectors.

Series:

Working Paper No. 07/287

Subject:

English

Publication Date:

December 1, 2007

ISBN/ISSN:

9781451868500/1018-5941

Stock No:

WPIEA2007287

Format:

Paper

Pages:

19

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