Testing for Ppp: Should We Use Panel Methods?

Empirical Economics (2005) 30:7791 within 10.1007/s00181-004-0222-8 Testing for PPP: Should we use panel methods? Anindya Banerjee1 , Massimiliano Marcellino2 , Chiara Osbat3 1 password section of Economics, European University set up, Via della Piazzuola 43, 50133 Firenze, Italy (e-mail: anindya.banerjee@iue.it) 2 Istituto di Economia Politica - Universita Bocconi, IGIER and CEPR Via Salasco 3, 20136 Milano, Italy 3 European primordial Bank, Kaiserstrasse 29, 60311 capital of Kentucky am Main, Germany First sport received: November 2001/ pass away-place version received : October 2003 Abstract. A common ?nding in the trial-and-error literature on the validity of purchasing creator semblance (PPP) is that it holds when tested for in panel data, but not in univariate (i.e. country-speci?c) analysis. The plebeian explanation for this mismatch is that panel tests for whole calm down argon more powerful than their univariate counterparts. In this paper we enkindl e an alternative explanation. Existing panel methods assume that cross- unit of meter cointegrating relationships, that would tie the units of the panel together, be not present.

Using simulations, we commemorate that if this important underlying self-assertion of panel unit source tests is violated, the empirical size of the tests is easily higher than the nominal level, and the void hypothesis of a unit root is rejected besides often even when it is true. more(prenominal) generally, this ?nding warns against the automatic use of panel methods for interrogatory for unit roots in macroeconomic time series. primeval words: PPP, unit root, panel cointegration, cross-unit dependenc e JEL classi?cations: C12, C13, C22, C23 1. ! Introduction The last few long time have seen a veritable(prenominal) explosion of papers on testing for purchasing power parity (PPP) using panels of macroeconomic data. A We wish to thank an anonymous referee and Ronnie MacDonald for helpful comments. The ?nancial check of the European University Institute in funding this research is to a fault appreciatively acknowledged. The views...If you want to get a full essay, come off it on our website: OrderEssay.net

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