O'Connell, Paul (1996) \The Overvaluation of Purchasing Power Parity. Journal of International Economics. Forthcoming.  Home/Search   Document Not in Database   Summary   Related Articles   Check

....#SBR 932078 to the NBER. A large number of recent papers have employed panel data to study PPP, including Abuaf and Jorion (1990) Canzoneri, Cumby and Diba (1996) Cumby (1996) Frankel and Rose (1996) Jorion and Sweeney (1996) Liu and Maddala (1996) Lothian (1996) MacDonald (1996) O Connell (1996), Oh (1996) Papell (1996) Wei and Parsley (1996) and Wu (1996) The motivation for using panel data is that it might increase the power of tests for PPP. It is well known that when the rate of convergence for a stationary series is very slow, long time series are needed to rule out the ....

....are just linear combinations of the former panel. If all elements of one panel are stationary, then all elements of the other panel must be stationary. 1 Most of the panel studies of PPP have assumed that shocks to real exchange rates are uncorrelated across the different real exchange rates. O Connell (1996) points out that this assumption is untenable. 2 Surely shocks to the U.S. German and U.S. Swiss real exchange rates are correlated. O Connell proposes estimating the system by GLS. We address that issue here, and show how some reasonable assumptions may allow one to reduce the number of ....

[Article contains additional citation context not shown here]

O'Connell, Paul, 1996, The overvaluation of purchasing power parity, working paper, Harvard University.

....show that the JLR test statistic in (9) is asymptotically distributed as 2 1 ( under the null hypothesis. 8 The JLR multivariate test employed here offers important methodological advantages over standard panel unit root tests suggested by Levin and Lin (1992, 1993) Im et al. 1995) O Connell (1998), and others. Such tests have as their null hypothesis that all variables in the panel are realizations of unit root processes. Hence, this null will be rejected if even one of the series in the panel is stationary. Under these conditions, rejection of the null leads to the misleading inference ....

O'Connell, P. (1998), The overvaluation of purchasing power parity, Journal o f International Economics, 44, 1-20.

....above results, the application of a panel unit root test to the system of forecast error series is bound to lead to substantial efficiency gains in estimation by exploiting the cross equation dependencies. Standard panel unit root tests suggested by Levin and Lin (1992, 1993) Im et al. 1995) O Connell (1998), and others, have as their null hypothesis that all variables in the panel are realizations of unitroot processes. This null will be rejected if even one of the series in the panel is stationary. Under these conditions, rejection of the null leads to the misleading inference that all series in ....

O'Connell, P. (1998), The overvaluation of purchasing power parity, Journal o f International Economics, 44, 1-20.

....within several samples of quarterly U.S. based real exchange rates. A major disadvantage of panel unit root testing based on the Levin and Lin (1992) approach is the assumption of cross sectional independence between the di erent real exchange rates within the panel. Monte Carlo experiments in O Connell (1998) indicate that panel unit root tests that neglect cross sectional dependence yields severely biased test results on cross sectionally correlated data. Given the fact that real exchange rates relative to the same base country are contemporaneously correlated, one should be doubtful with respect to ....

....data. Given the fact that real exchange rates relative to the same base country are contemporaneously correlated, one should be doubtful with respect to test results based on the Levin and Lin (1992) approach. A second group of panel based studies, most notably Abuaf and Jorion (1990) and O Connell (1998), utilize panel unit root test regressions where they allow for cross sectional correlation across the included real exchange rates. On a monthly sample of G10 real exchange rates over the period 1973 1987 Abuaf and Jorion (1990) only rejects the null of non stationarity marginally at a 10 signi ....

[Article contains additional citation context not shown here]

O'Connell, P., 1998, The Overvaluation of Purchasing Power Parity, Journal of International Economics 44, 1-19.

....One way of dealing with this time span problem is to analyze time series across similar cross sections in panel data sets. This approach has recently been applied on a large scale in testing the validity of purchasing power parity for exchange rates, as amongst others in Papell (1997) and O Connell (1998). The panel data approach is the main focus of our paper. One can distinguish two viewpoints in the literature on cointegration analysis within panels. The rst approach can be typi ed as a panel version of the Engle and Granger (1987) residual based two step procedure. In that approach one ....

....(1991) who develop a seemingly unrelated regression analog for a system of canonical cointegrating regressions based on the approach of Park (1992) However, they only deal with cointegrating vector estimation and not with cointegration testing. 3 This is shown in Monte Carlo experiments in O Connell (1998) and Groen (1999) for the Levin and Lin (1992) panel unit root test and the panel Engle Granger approach respectively. 4 Pedroni (1996) based on the Fully Modi ed OLS approach of Phillips (1995) and Pesaran et al. 1998) based on single equation error correction models also has this feature, ....

O'Connell, P., 1998, The Overvaluation of Purchasing Power Parity, Journal of International Economics 44, 1-19.

.... An early indication of the possible success of pooling data on the monetary exchange rate model can be found in Frankel (1984) who estimates a pooled model in levels but does not address the issue of 1 For example Abuaf and Jorion (1990) Frankel and Rose (1996) Oh (1996) and Papell (1997) O Connell (1998) cannot reject non stationarity in panels of real exchange rates. 2 non stationarity. In our paper we estimate a static version of a simple monetary exchange rate model on panels of exchange rate data for at the most fourteen countries in the 1973 1994 postBretton Woods period. As a next step ....

....correlated it s in (8) is necessary. 7 We shall denote the corresponding t value as t . The null hypothesis is that of no cointegration and the alternative is that of cointegration with adjustment parameter . 8 Except Abuaf and Jorion (1990) Koedijk and Schotman (1990) and O Connell (1998), most panelbased studies of real exchange rates discarded the issue of cross sectional dependence. 7 To correct for the above mentioned cross sectional dependence we estimate (8) with feasible generalized least squares (FGLS) based on the OLS residuals of (8) Estimation with FGLS not only ....

O'Connell, P., 1998, The Overvaluation of Purchasing Power Parity, Journal of International Economics 44, 1-19.

....lack of power of standard unit root tests in small samples and the lack of power against near nonstationary alternatives. The proposed solutions include the use of long spans of data (Grilli and Kaminsky 1991, Lothian and Taylor 1996) and the use of panel unit root tests (Frankel and Rose 1996, O Connell 1998). Economic explanations have also been given, such as the presence of nontraded goods in the price indices which are usually employed to construct real exchange rates (Rogers and Jenkins 1995) and the presence of transaction costs (Davutyan and Pippenger 1990, Dumas 1992, Uppal 1993) Here we ....

O'Connell, P.G.J., 1998, The overvaluation of purchasing power parity, Journal of International Economics 44, 1--19.

....of nontraded goods in the real exchange rate. In this study we do not address the recent panel tests for PPP, such as Frankel and Rose (1996) and Wei and Parsley (1995) 24 It seems likely that these tests would suffer from similar size problems as the ones addressed here. However, note that O Connell (1998) and Engel, Hendrickson and Rogers (1997) argue that these panel studies have size biases stemming from an entirely different source failure to control adequately for cross sectional correlation. 22 The conclusion in this paper that we cannot rule out an economically significant permanent ....

O'Connell, Paul, 1998, The overvaluation of purchasing power parity, Journal of International Economics 44, 1-19.

No context found.

O'Connell, Paul (1996) \The Overvaluation of Purchasing Power Parity. Journal of International Economics. Forthcoming.

No context found.

O'Connell, P., 1998, The Overvaluation of Purchasing Power Parity, Journal of International Economics 44, 1-19. 17

No context found.

O'Connel, Paul G. J. (1998). \The Overvaluation of Purchasing Power Parity". Journal of International Economics 44:1-19.

No context found.

O'Connell, P., 1998. Overvaluation of Purchasing Power Parity. Journal of International Economics 44, 1-20.

Online articles have much greater impact   More about CiteSeer.IST   Add search form to your site   Submit documents   Feedback  

CiteSeer.IST - Copyright Penn State and NEC