State of the Art Unit Root Tests and Purchasing Power Parity

Claude Lopez · Christian Joseph Murray · David H. Papell

110 citations0/0 files storedJournal of money credit and banking

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Abstract

Although the question of whether Purchasing Power Parity (PPP) holds in the long run has been extensively studied, the answer is still controversial.Some of the strongest evidence is provided by Taylor (2002), who concludes that long-run PPP held over the twentieth century.We argue that this conclusion is quite sensitive to the use of suboptimal lag selection in unit root tests.Using superior lag selection methods, we find that long run PPP held for the real exchange rates of only 9 out of the 16 industrialized countries in Taylor's sample with the U.S. dollar as the base currency.

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References

1996Efficient Tests for an Autoregressive Unit Root 1992Efficient Tests for an Autoregressive Unit Root 2001LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power 1995Unit Root Tests in ARMA Models with Data-Dependent Methods for the Selection of the Truncation Lag 1994Testing for a Unit Root in Time Series With Pretest Data-Based Model Selection 2002A Century of Purchasing-Power Parity

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