Panel Stationarity Tests for Purchasing Power Parity with Cross-Sectional Dependence

Posted: 14 Jun 2006

See all articles by David Harris

David Harris

University of Melbourne - Department of Economics

Stephen J. Leybourne

University of Nottingham

Brendan P.M. McCabe

University of Liverpool - Management School (ULMS)

Abstract

We investigate the purchasing power parity hypothesis for a group of 17 countries using a new panel based test of stationarity that allows for arbitrary cross-sectional dependence. We treat the short run time series dynamics non-parametrically and thus avoid the need to fit separate, and potentially misspecified, models for the individual series. The statistic is simple to compute and uses standard Normal critical values, even in the presence of a wide range of deterministic components. We also show how the test can be applied using an approximate factor model for cross sectional dependence. Taken together, these features provide a generally applicable solution to the problem of testing for stationarity versus unit roots in macro-panel based data. The tests find significant evidence against the purchasing power parity hypothesis being true.

JEL Classification: C12, C32, C33

Suggested Citation

Harris, David and Leybourne, Stephen J. and McCabe, Brendan P.M., Panel Stationarity Tests for Purchasing Power Parity with Cross-Sectional Dependence. Journal of Business and Economic Statistics, Vol. 23, 2005, Available at SSRN: https://ssrn.com/abstract=908476

David Harris (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Stephen J. Leybourne

University of Nottingham ( email )

University Park
School of Economics
Nottingham NG7 2RD
United Kingdom
+44 (0)115 9515478 (Phone)
+44 (0)115 951 4159 (Fax)

Brendan P.M. McCabe

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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