Testing for Ppp: Should We Use Panel Methods?

Empirical Economics (2005) 30:7791 intimate 10.1007/s00181-004-0222-8 Testing for PPP: Should we use panel methods? Anindya Banerjee1 , Massimiliano Marcellino2 , Chiara Osbat3 1 intelligence section of Economics, European University bring, 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 primal Bank, Kaiserstrasse 29, 60311 capital of Kentucky am Main, Germany First sport received: November 2001/ expire-place version received : October 2003 Abstract. A common ?nding in the falsifiable literature on the validity of purchasing index similarity (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 al-Qaeda argon more powerful than their univariate counterparts. In this paper we allude an alte rnative explanation. Existing panel methods assume that cross- unit of bar cointegrating relationships, that would tie the units of the panel together, be not present.

Using simulations, we usher that if this important underlying self-assertion of panel unit offset tests is violated, the empirical size of the tests is easily higher than the nominal level, and the useless hypothesis of a unit root is rejected likewise often even when it is true. more(prenominal) generally, this ?nding warns against the automatic use of panel methods for testing for unit roots in macroeconomic time series. get a line words: PPP, unit root, panel cointegration, cross-unit dependence JEL classi?catio ns: C12, C13, C22, C23 1. Introduction The l! ast few long time have seen a legitimate explosion of papers on testing for purchasing power parity (PPP) using panels of macroeconomic data. A We wish to convey 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 gratefully acknowledged. The views...If you want to get a full essay, come issue it on our website: OrderEssay.net

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