Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 303: A long memory panel unit root test: PPP revisited

Jonas Andersson and Johan Lyhagen ()
Additional contact information
Jonas Andersson: Department of Statistics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Johan Lyhagen: Dept. of Economic Statistics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: In this paper two techniques, long memory and panel data models, are combined in order to increase the power of unit root tests. The power is shown to be always better against fractional alternatives and usually against autoregressive alternatives. The test is then used to reanalyze data sets investigated by Cheung and Lai (1993), Oh (1996) and Papell (1997) who studied the purchasing power parity. In some cases, the test rejected the hypothesis of no cointegration between foreign and domestic prices where the other authors tests did not.

Keywords: Unit root; Long memory; Purchasing power parity

JEL-codes: C12; C14; C22; C23

14 pages, February 12, 1999

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