Testing for Purchasing Power Parity in Cointegrated Panels /

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...

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Bibliographic Details
Main Author: Lyhagen, Johan
Other Authors: Carlsson, Mikael, Osterholm, Par
Format: Journal
Language:English
Published: Washington, D.C. : International Monetary Fund, 2007.
Series:IMF Working Papers; Working Paper ; No. 2007/287
Subjects:
Online Access:Full text available on IMF
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490 1 |a IMF Working Papers 
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520 3 |a 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 esimators 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. 
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700 1 |a Osterholm, Par. 
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