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Johan Lyhagen
 
''Why not use standard panel unit root test for testing PPP''
( 2008, Vol. 3 No.26 )
 
 
In this paper we show the consequences of applying a panel unit root test that assumes independence between the cross-sections when testing for a purchasing power parity relationship. The distribution of the tests investigated, including the IPS test of Im et al (2003), are influenced by a common stochastic trend which is usually not accounted for. The result is that the empirical size tends to one with the number of cross-sections. Hence, it is of crucial importance to account for this cross-sectional dependency.
 
 
Keywords:
JEL: C2 - Single Equation Models; Single Variables: General
 
Manuscript Received : Sep 19 2007 Manuscript Accepted : May 14 2008

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