Evidence on PPP for selected Asian countries from a panel cointegration test with structural breaks

The goal of this article is to examine evidence for purchasing power parity (PPP) for a panel of Asian countries, namely Malaysia, Thailand, India, Pakistan, Sri Lanka and the Philippines. Our main contribution is that for the first time in this literature we use a panel cointegration test, developed by Westerlund (2006), which allows us to incorporate multiple structural breaks. We find that using Gregory and Hansen's (1996) residual-based test for cointegration and Pedroni's (1999) panel cointegration test without structural breaks provide weak evidence of cointegration between nominal exchange rates vis-à-vis the US dollar and relative prices. However, when we use the Lagrange multiplier panel structural break cointegration test we find strong evidence of panel cointegration, providing evidence for PPP.

A panel bootstrap cointegration test

This paper proposes a bootstrap test for the null hypothesis of cointegration in panel data. The test is general enough to allow for dependence both within and between the cross-sectional units, and is shown to work well in small samples. © 2007 Elsevier B.V. All rights reserved.

Panel cointegration tests of the Fisher hypothesis

Recent empirical studies suggest that the Fisher hypothesis, stating that inflation and nominal interest rates should cointegrate with a unit parameter on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be explained in part by the low power inherent in univariate cointegration tests and that the use of panel data should generate more powerful tests. In doing so, we propose two new panel cointegration tests, which are shown by simulation to be more powerful than other existing tests. Applying these tests to a panel of monthly data covering the period 1980:1 to 1999:12 on 14 OECD countries, we find evidence supportive of the Fisher hypothesis.

Reducing the size distortions of the panel LM test for cointegration

This paper proposes a simple procedure to reduce the size distortions of the panel LM test for cointegration. The new procedure is based on first splitting the sample into even and odd numbered observations, and to employ the panel LM test to each subsample. The two tests are then combined using the Bonferroni principle as suggested by Choi [Choi, I., 2004, Improving the empirical size of the KPSS Test of stationarity, unpublished manuscript, Department of Economics, Hong Kong University of Science and Technology]. The Monte Carlo evidence suggests that this procedure can lead to substantial reduction in size distortions when the equilibrium errors are autoregressive. © 2005 Elsevier B.V. All rights reserved.

A panel CUSUM test of the null of cointegration

This paper proposes a simple residual-based panel CUSUM test of the null hypothesis of cointegration. The test has a limiting normal distribution that is free of nuisance parameters, it is robust to heteroskedasticity and it allows for mixtures of cointegrated and spurious alternatives. Our Monte Carlo results suggest that the test has small-size distortions and reasonable power. In our empirical application to international R&D spillovers, we present evidence suggesting that total factor productivity is heterogeneously cointegrated with foreign and domestic R&D capital stocks. © Blackwell Publishing Ltd, 2005.

On the use of panel cointegration tests in energy economics

There is a burgeoning literature based on using panel cointegration techniques to study the relationship between energy consumption and GDP. Most panel cointegration tests employed take no cointegration as the null hypothesis. The current paper illustrates how a rejection by such a test cannot be taken as evidence of cointegration for the panel as a whole, a fact that seems to have gone largely unnoticed in the literature. Hence, even if the no cointegration null is rejected, this evidence is not enough to ensure that the relationship can be meaningfully estimated, as most (if not all) estimators in the literature require that the panel is cointegrated as a whole.

Panel cointegration tests with deterministic trends and structural breaks

This paper proposes Lagrange multiplier (LM) based tests for the null hypothesis of no cointegration in panel data. The tests are general enough to allow for heteroskedastic and serially correlated errors, individual specific time trends, and a single structural break
in both the intercept and slope of each regression, which may be located different dates for different individuals. The limiting distributions of the test statistics are derived, and are found to be standard normal and free of nuisance parameters under the null. In
particular, the distributions are found to be invariant not only withrespect to trend and structural break, but also with respect to the presence of stochastic regressors. A small Monte Carlo study is also conducted to investigate the small-sample properties of the tests. The results reveal that the tests have small size distortions and good power even in very small samples.

Testing for panel cointegration with multiple structural breaks

This paper proposes a Lagrange multiplier (LM) test for the null hypothesis of cointegration that allows for the possibility of multiple structural breaks in both the level and trend of a cointegrated panel regression. The test is general enough to allow for endogenous regressors, serial correlation and an unknown number of breaks that may be located at different dates for different individuals. We derive the limiting distribution of the test and conduct a small Monte Carlo study to investigate its finite sample properties. In our empirical application to the solvency of the current account, we find evidence of cointegration between saving and investment once a level break is accommodated. © Blackwell Publishing Ltd, 2006.

Error-correction-based cointegration tests for panel data

This article describes a new Stata command called xtwest, which implements the four error-correction-based panel cointegration tests developed by Westerlund (2007). The tests are general enough to allow for a large degree of heterogeneity, both in the long-run cointegrating relationship and in the short-run dynamics, and dependence within as well as across the cross-sectional units.

Mixed signals among tests for panel cointegration

In this paper, we study the effect that different serial correlation adjustment methods can have on panel cointegration testing. As an example, we consider the very popular tests developed by Pedroni [Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics 61, 653670., Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory 20, 597-625.]. Results based on both simulated and real data suggest that different adjustment methods can lead to significant variations in test outcome, and thus also in the conclusions. © 2007 Elsevier B.V. All rights reserved.

A panel cointegration analysis of the demand for oil in the Middle East

This article applies recently developed panel unit root and panel cointegration techniques to estimate the long-run income and price elasticities for oil in the Middle East. The results for the panel indicate that demand for oil is highly price inelastic and slightly income elastic in the Middle East. There is considerable variation in the results for the income variable across countries, with the coefficient on the income variable statistically insignificant for several countries. The coefficient on the price variable is statistically significant in all cases with the expected sign and the price elasticity is uniformly low. While the results for the income variable differ across countries, the results for the panel as a whole suggest that the demand for oil in the Middle East is being driven largely by strong economic growth, while consumers are largely insensitive to price changes.

Energy consumption and real GDP in G7 countries : new evidence from panel cointegration with structural breaks

This paper examines the relationship between capital formation, energy consumption and real GDP in a panel of G7 countries using panel unit root, panel cointegration, Granger causality and long-run structural estimation. We find that capital formation, energy consumption and real GDP are cointegrated and that capital formation and energy consumption Granger cause real GDP positively in the long run. We find that a 1% increase in energy consumption increases real GDP by 0.12–0.39%, while a 1% increase in capital formation increases real GDP by 0.1–0.28%.

Evidence on PPP from a cointegration test with multiple structural breaks

Despite a plethora of studies on purchasing power parity (PPP), those that take a cointegration approach have found mixed evidence on PPP. The goal of this article is to obviate existing tensions in the PPP literature by using a simple test for cointegration between nominal exchange rate and relative prices that accounts for multiple structural breaks. We find that for 14 out of 15 OECD countries, there is evidence of a cointegration relationship between nominal exchange rate and relative prices at the 5% level. Only for Japan, we find evidence for cointegration at the 2.5% level. These results suggest overwhelming evidence of support for PPP for the OECD countries.

Electricity consumption in G7 countries : a panel cointegration analysis of residential demand elasticities

This article applies recently developed panel unit root and panel cointegration techniques to estimate the long-run and short-run income and price elasticities for residential demand for electricity in G7 countries. The panel results indicate that in the long-run residential demand for electricity is price elastic and income inelastic. The study concludes that from an environmental perspective there is potential to use pricing policies in the G7 countries to curtail residential electricity demand, and thus curb carbon emissions, in the long run.