Testing for Purchasing Power Parity in Cointegrated Panels

By Johan Lyhagen, Pär Österholm, Mikael Carlsson

December 1, 2007

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Johan Lyhagen, Pär Österholm, and Mikael Carlsson. Testing for Purchasing Power Parity in Cointegrated Panels, (USA: International Monetary Fund, 2007) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Exchange rates, Purchasing power parity

Keywords: Integrating vector, WP

Publication Details

Pages:

19
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/287
Stock No:

WPIEA2007287
ISBN:

9781451868500
ISSN:

1018-5941

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