Empirical Economics

, Volume 44, Issue 2, pp 833–860

A modified LLC panel unit root test of the PPP hypothesis

Article

DOI: 10.1007/s00181-012-0552-x

Cite this article as:
Westerlund, J. & Blomquist, J. Empir Econ (2013) 44: 833. doi:10.1007/s00181-012-0552-x

Abstract

In a recent study, Westerlund (Empir Econ 37:517–531, 2009) shows that the performance of the popular LLC (Levin et al., J Econ 108:1–24, 2002) panel unit root test depends critically on the choice of lag truncation used when correcting for serial correlation, and that it is only when this parameter is set as a function of time that the power raises above size. The purpose of the current paper is to propose a modified test that does not suffer from this drawback. The new test is not only simpler to compute but also superior in terms of small-sample performance, which is illustrated using an example purchasing power parity for less developed countries.

Keywords

Non-stationary panel data Panel unit root test Purchasing power parity Cross-section dependence 

Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  1. 1.Faculty of Business and Law, School of Accounting, Economics and FinanceDeakin UniversityBurwoodAustralia
  2. 2.Department of EconomicsLund UniversityLundSweden

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