Scandinavian Working Papers in Economics

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

No 413: Why not use standard panel unit root test for testing PPP

Johan Lyhagen ()
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Johan Lyhagen: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: In this paper we show the consequences of applying a panel unit root test when testing for a purchasing power parity relationship. The distribution of the tests investigated, including the IPS test of Im et al (1997), are influenced by a common stochastic trend which is usually not accounted for. The result is that the size tends to one with the number of cross-sections.

Keywords: Dynamic panels; Monte Carlo; Purchasing power parity

JEL-codes: C12; C22; C23

11 pages, November 29, 2000

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