Abstract
Im et al. (Unpublished working paper, 2008) develop cointegration tests using stationary instrumental variables. Their tests avoid the need to simulate critical values for the cointegration estimations, especially problematic in the presence of a nuisance parameter. Likewise, bootstrapping errors is unnecessary. Using an updated version of the Taylor (Rev Econ Stat 84(1):139–150, 2002) data set, the Im et al. (Unpublished working paper, 2008) approach is applied to two well-known, single equation cointegration methods to test for purchasing power parity. The estimations with instruments provide evidence of purchasing power parity (PPP) for more than half of the countries studied; but the empirical results, hence conclusions regarding PPP sometimes differ with the choice of instrument.
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Notes
A list of countries and periods of coverage are provided in Table 5 of the “Appendix”. Data for Argentina are only available to 2006. The Taylor data also include information for three additional countries (Chile, Greece, and New Zealand) for shorter periods of coverage and not reported in Taylor (2002). Data for these three countries are included in this study.
They eliminate Argentina, Brazil, and Mexico from their study. Their data are updated to 1998.
See Taylor (2001) on this issue.
Taylor (2001) shows that temporal aggregation of exchange rate and price data may also bias the results against rejecting a unit root null in the real exchange rate.
See Im et al. (2008) for proofs and more detail.
Except for the US price level, which must be integrated since the dollar is the numeraire currency.
Since the PPP relationship does not include a deterministic time trend; t is omitted from the empirical models.
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Acknowledgments
I thank Alan Taylor for providing his data. Walt Enders kindly shared computer code, recent versions of his working papers cited herein, and helpful comments on an earlier version of the paper. Gary Shelley and an anonymous referee made a number of useful suggestions that greatly improved the paper. I have also benefited from the comments of seminar participants at the Banco de México, the Universidad Autónoma de Nuevo León, and the Centro de Investigaciones Socioeconómicos of the Universidad Autónoma de Coahuila. Errors are mine, of course. Financial support from Mexico′s National Council for Science and Technology (CONACYT) is gratefully acknowledged.
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Wallace, F.H. Cointegration tests of purchasing power parity. Rev World Econ 149, 779–802 (2013). https://doi.org/10.1007/s10290-013-0165-2
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DOI: https://doi.org/10.1007/s10290-013-0165-2