Abstract
Pitfalls in Panel Tests of Purchasing Power Parity. —The results of panel unit root tests applied to real exchange rates as a test of long-run purchasing power parity (PPP) diverge much. In particular, due to misspecifications there is little evidence of the convergence of real exchange rates for the German mark. This paper provides evidence of this issue by analyzing large panels of real exchange rates vis-a-vis the German mark and the dollar. In particular, the impact of the base country and various aspects of the dynamic specifications are analyzed. Overall, the results provide strong evidence in favour of PPP as a long-run relationship.
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