Misleading Inferences from Panel Unit‐Root Tests with an Illustration from Purchasing Power Parity

Breuer, Janice Boucher; McNown, Robert; Wallace, Myles S.

doi:10.1111/1467-9396.00294

Cited by 187 publications

(183 citation statements)

References 18 publications

(32 reference statements)

Supporting

Mentioning

182

Contrasting

Order By: Relevance

“…H ow ever, these tests are incapable of providing inform ation pertaining to the exact mix of series in the panel w h e n the null hypothesis is rejected. Consequently, Breuer et al (2001Breuer et al ( , 2002 propose the tests that use the m eth o d of seem ingly unrelated regressions applied to a panel ADF equations in which the autoregressive coefficients are heterogeneous across the panel. These tests are capable of providing the researcher with inform ation pertain in g to the exact mix of series in the panel w hen the null hypothesis is rejected.…”

Section: Does Long Run Purchasing Poxver Parihi 219mentioning

confidence: 99%

“…These retain the all-or-nothing style, therefore, m ay lead to serious m isinterpretation if applied to mixed panels (Breuer et al, 2001). Papell (1997) m odified the Levin and Lin specification slightly to allow for heterogeneous serial correlation of errors.…”

Section: Does Long Run Purchasing Poxver Parity 217mentioning

confidence: 99%

“…1 2 , No. 1 & 2, 2008As Breuer et al (2001 point out, it is incorrect to conclude that rejection of the null hypothesis using the Levin and Lin approach signifies stationarity of all variables in all the members of the panel. Rejection of the null hypothesis of u n it root in a panel setting can come up w hen some, but not all, m em bers of the panel are stationary.…”

mentioning

confidence: 99%

“…These retain the all-or-nothing style, therefore, m ay lead to serious m isinterpretation if applied to mixed panels (Breuer et al, 2001).…”

mentioning

confidence: 99%

See 3 more Smart Citations

Does Long Run Purchasing Power Parity (PPP) Hold Within The Southern African Customs Union (SACU)?

Makhetha¹

2010

Rev South Afr Stud

View full text Add to dashboard Cite

to investigate the validity or otherwise o f the PPP hypothesis within the SACU area. We are able to find evidence in support of the PPP hypothesis using Larsson et al. (1998Larsson et al. ( , 2001. The Larsson et al.'s (1998Larsson et al.'s ( , 2001 procedure is an extension of Johansen's (1988Johansen's ( , 1995 methodology that allows for estimation of the number of co-integrating relations. This offers an interesting alternative to the residual based co-integration tests. IntroductionThe Purchasing Pow er Parity (PPP) hypothesis is the hypothesis that exchange rates betw een currencies are determ ined in the long ru n by the a m o u n t of goods and services that each can buy. A basic n o tio n is that in the absence of trade im pedim ents, if the price of tradables were low er in one country than another, trad ers could gain by buying goods in the cheaper country an d selling in the dearer. Consequently, relative price levels determ ine the equilibrium exchange rate. The first person to treat PPP as a practical em pirical theory is Cassel (1921Cassel ( , 1922. PPP can be used for a w id e range of applications. For instance, in: choosing the right initial exchange rate for a new ly independent country; forecasting the real exchange rate an d adjusting for price differential in international com parisons of incomes.This p ap er em ploys panel data unit root and co integration tests to investigate the validity of PPP hypothesis in SACU area. The rationale for using panel data unit root and co-integration techniques is that they offer a significant improvement in addressin g the low -pow er problem of the conventional tests, especially, in developing countries where there are serious data limitations; and facilitate pooling of long ru n inform ation contained in the panel, while permitting the short ru n dynam ics and fixed effects to be heterogeneous am o n g different m em bers of the panel. Moreover, long-run relations betw een tw o integrated panel vectors can exist even though there is no individual time series co-integration (Phillip an d Moon, 1999). Most of the conventional tests suffer from size distortions (probability of falsely rejecting the null of "non-stationarity" is high, especially, w h en the true data generating process (d.g.p) is a nearly stationary process). There is a trade off between size and pow er in that un it root tests m ust have either high probability of falsely rejecting the null of non-stationarity when the true data generating process is a nearly stationary process or low p o w er against any stationary alternative (Blough, 1992). They are very sensitive to the choice of lag length, and the inclusion or otherw ise of constant and trend terms. M oreover, there is supporting evidence that it is the span of data not the frequency of data that m atters for the power of these tests (Pedroni, 1997). Therefore, unit root and co-integration tests based on quarterly data do not necessarily have better pow er than those based on corresponding annual data. In the light of these data li...

show abstract

Section: Does Long Run Purchasing Poxver Parihi 219mentioning

confidence: 99%

Section: Does Long Run Purchasing Poxver Parity 217mentioning

confidence: 99%

mentioning

confidence: 99%

“…These retain the all-or-nothing style, therefore, m ay lead to serious m isinterpretation if applied to mixed panels (Breuer et al, 2001).…”

mentioning

confidence: 99%

See 2 more Smart Citations

Does Long Run Purchasing Power Parity (PPP) Hold Within The Southern African Customs Union (SACU)?

Makhetha¹

2010

Rev South Afr Stud

View full text Add to dashboard Cite

show abstract

“…While empirical evidence shows that stationarityy of the real exchange rate (RER) is abundant in developing countries (Bahmani-Oskooee, 1995;Breuer et al, 2001). Few studies have been conducted using date from small developing countries and, in particular, from Africa.…”

Section: Introductionmentioning

confidence: 99%

Threshold effects in purchasing power parity for African Countries

Yu-Shao¹,

Liu²,

Mengnan³

et al. 2011

Afr. J. Bus. Manage.

View full text Add to dashboard Cite

This study applies non-linear threshold unit-root test to assess the non-stationary properties of the real exchange rate for twenty African countries. We found that non-linear threshold unit-root test has higher power than linear method. As suggested by Caner and Hansen (2001), the true data generating process of exchange rate is a stationary non-linear process. We examine the validity of PPP from the non-linear point of view and provide robust evidence clearly indicating that purchasing power parity (PPP) holds true for six countries, namely; Egypt, Ethiopia, Gambia, Malawi, Seychelles and South Africa. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a non-linear way.

show abstract

Purchasing Power Parity in Nine Transition Countries: Panel Surkss Test

Chang

Tzeng

2011

Int. J Fin Econ

View full text Add to dashboard Cite

This study applies Panel Seemingly Unrelated Regressions Kapetanios et al. (SURKSS) tests, proposed by Wu and Lee (2009), to investigate the properties of long-run purchasing power parity (PPP) in nine transition countries over the period of January 1995 to December 2008. The empirical results from the univariate unit-root and panel-based unit-root tests indicate that PPP does not hold for these nine countries under study. However, Panel SURKSS tests indicate that PPP is valid for only two of these nine countries. As concerns major policy, our study implies that PPP can be used to determine the equilibrium exchange rate for both Estonia and Hungary, two countries under study. Our results emphasized that there is weak evidence about the long-run PPP hypothesis in transition countries, and the validity of PPP remains a controversial and unsettled issue. Copyright

show abstract

Misleading Inferences from Panel Unit‐Root Tests with an Illustration from Purchasing Power Parity

Cited by 187 publications

References 18 publications

Does Long Run Purchasing Power Parity (PPP) Hold Within The Southern African Customs Union (SACU)?

Does Long Run Purchasing Power Parity (PPP) Hold Within The Southern African Customs Union (SACU)?

Threshold effects in purchasing power parity for African Countries

Purchasing Power Parity in Nine Transition Countries: Panel Surkss Test

Contact Info

Product

Resources

About