A bootstrap panel unit root test under cross-sectional dependence, with an application to PPP

Authors:
Mario Cerrato;Nicholas Sarantis
Affiliations:
Centre for International Capital Markets, Department of Economics, Finance and International Business, London Metropolitan University, 84 Moorgate, London EC2M 6SQ, UK;Centre for International Capital Markets, Department of Economics, Finance and International Business, London Metropolitan University, 84 Moorgate, London EC2M 6SQ, UK
Venue:
Computational Statistics & Data Analysis
Year:
2007

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Abstract

A bootstrap methodology for dealing with cross-sectional dependence in panel unit root tests of real exchange rates is suggested. Monte Carlo simulations are employed to investigate the size distortion and the power of the bootstrap test-statistic. It is shown that the statistic has good power and no size distortions for moderate and large samples. The panel unit root test procedure is then applied to the long-run purchasing power parity (PPP) hypothesis, using a panel of 20 OECD countries over the recent float period, and the results are compared to those obtained by other tests.