Testing for Purchasing Power Parity in Cointegrated Panels

Download or read book Testing for Purchasing Power Parity in Cointegrated Panels written by Mikael Carlsson and published by International Monetary Fund. This book was released on 2007 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 estimators 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.