Purchasing power parity
Subtitle: three stakes through the heart of the unit root null
By: Matthew Higgins and Egon Zakrajšek.
Contributors: Zakrajšek, Egon.; Federal Reserve Bank of New York.
Series: Staff reports ;; no. 80; Staff reports (Federal Reserve Bank of New York : Online) ;; no. 80.
Publisher: Federal Reserve Bank of New York
Published: 1999
Place of publication: [New York, N.Y.]
Language: eng
Format: Electronic resource
Subjects: Purchasing power parity -- Econometric models.
Description: "A recent influential paper (O'Connell 1998) argues that panel data evidence in favor of purchasing power parity disappears once test procedures are altered to accommodate heterogenous cross-sectional dependence among real exchange rate innovations.  We present evidence to the contrary.  First, we modify two extant panel unit root panel unit root tests to eliminate the upward size distortion induced by contemporaneous cross-sectional dependence.  Second, we exploit a recently-introduced test, based on SUR techniques, that also remains valid in the presence of cross-sectional dependence.  Using the three new tests, we find overwhelming evidence in favor of real exchange rate stationarity during the post-Bretton Woods era among OECD economies, as well as among a larger group of "open" economies.  We also find emphatic evidence of stationarity using O'Connell's GLS test.  Bias-corrected parameter estimates indicate that deviations from PPP erode more quickly for real exchange rates defined using wholesale rather than consumer price indices.  Monte Carlo experiments indicate that several of the tests discussed here have considerable power against the unit root null"--Federal Reserve Bank of New York web site.
Notes: Includes bibliographical references.
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Mode of access: World Wide Web.