Panel data tests of PPP: a critical overview

Caporale, Guglielmo Maria; Cerrato, Mario

doi:10.1080/09603100500389143

Cited by 30 publications

(18 citation statements)

References 59 publications

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“…6 Similar patterns emerge for Australia, Brazil, Canada, Denmark, Finland, France, Mexico, the Netherlands, Norway, Portugal, Sweden and the UK, that is 14 out of 19 countries for which the sample size is sufficiently large to make statistically meaningful statements. 7 More recently, panel cointegration methods have been used to deal with the issue of the low power of time series tests of PPP (see, e.g., Pedroni, 2004, and also, for an extensive survey of the literature, Caporale and Cerrato, 2006). We are currently investigating whether such methods also produce erratic behaviour.…”

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confidence: 99%

Cointegration tests of PPP: do they also exhibit erratic behaviour?

Caporale

Hanck

2009

Applied Economics Letters

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We analyse whether tests of PPP exhibit erratic behaviour (as previously reported by Caporale et al., 2003) even when (possibly unwarranted) homogeneity and proportionality restrictions are not imposed, and trivariate cointegration (stage-three) tests between the nominal exchange rate, domestic and foreign price levels are carried out (instead of stationarity tests on the real exchange rate, as in stage-two tests). We examine the US dollar real exchange rate vis-à-vis 21 other currencies over a period of more than a century, and find that stage-three tests produce similar results to those for stage-two tests, namely the former also behave erratically. This confirms that neither of these traditional approaches to testing for PPP can solve the issue of PPP.JEL Code: C12, C22, F31.

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Section: Figure 11mentioning

confidence: 99%

Cointegration tests of PPP: do they also exhibit erratic behaviour?

Caporale

Hanck

2009

Applied Economics Letters

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“…We also adopt the cross-sectionally augmented Im, Pesaran and Shin (CIPS) panel unit root test proposed by Pesaran (2007). The PP test is adopted as it is the most heterogeneous unit root test (see Caporale and Cerrato, 2006), while the LLC test is employed given its high power in small samples (see Hlouskova and Wagner, 2006). It is worth noting that the LLC test may lead to spurious inference when the errors are not independent across i, as it assumes cross-sectional independence.…”

Section: Unit Root Testsmentioning

confidence: 99%

Modelling long-run money demand: a panel data analysis on nine developed economies

Foresti

Napolitano

2013

Applied Financial Economics

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In this article, we investigate the presence of a long-run money demand in a\ud selected group of nine developed OECD countries (G7 plus Australia and\ud Switzerland). Our estimations are based on panel DOLS and between-dimension\ud group-mean panel DOLS introduced by Mark and Sul (2003) and Pedroni (2001),\ud respectively. We employ income and wealth as alternative scale variables to\ud model two money demand functions using quarterly data for the period 1982 to\ud 2008. Our results highlight the role of total wealth in the determination of money\ud demand with a positive elasticity. Moreover, a parameter stability analysis suggests that estimated money demand with the inclusion of wealth is more stable

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“…This apparent contradiction is known as the 'PPP puzzle' (see Rogoff, 1996) and has frequently been attributed to the limitations of standard unit root and cointegration tests (see Froot and Rogoff, 1995). Subsequent studies using panel methods (see Caporale and Cerrato (2006) for a survey) or examining nonlinearities (see, for example, Taylor et al, 2001) still reach mixed conclusions.…”

Section: Introductionmentioning

confidence: 95%

Non-normality, heteroscedasticity and recursive unit root tests of PPP: solving the PPP puzzle?

Caporale

Gregoriou

2009

Applied Economics Letters

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In this article, we carry out unit root tests on real exchange rates recursively as in Caporale et al. (2003), but, following Arghyrou and Gregoriou (2007), we adjust the residuals for non-normality and heteroscedasticity using a wild bootstrap method. The results are striking: this correction sharply increases the rejection percentages of the unit root null and attenuates the erratic behaviour of the t-statistic, providing evidence in favour of purchasing power parity (PPP) and suggesting that such a correction might at least go some way towards solving the 'PPP puzzle'.

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Panel data tests of PPP: a critical overview

Abstract: This paper reviews recent developments in the analysis of non-stationary panels, focusing on empirical applications of panel unit root and cointegration tests in

Cited by 30 publications

References 59 publications

Cointegration tests of PPP: do they also exhibit erratic behaviour?

Cointegration tests of PPP: do they also exhibit erratic behaviour?

Modelling long-run money demand: a panel data analysis on nine developed economies

Non-normality, heteroscedasticity and recursive unit root tests of PPP: solving the PPP puzzle?

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