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Testing for Purchasing Power Parity: Econometric Issues and an Application to Developing Countries
Author(s) -
Boyd Derick,
Smith Ron
Publication year - 1999
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00148
Subject(s) - purchasing power parity , economics , econometrics , inference , estimation , econometric model , panel data , specification , parity (physics) , purchasing power , computer science , macroeconomics , exchange rate , physics , management , particle physics , artificial intelligence
There is now a vast literature on testing purchasing power parity (PPP). Any test is conditional on a particular econometric specification which embodies a set of auxiliary assumptions. This paper reviews the issues involved in econometric specification and estimation in the time series and panel models used to test PPP. We start from a general model and then systematically examine the implicit restrictions that are imposed to obtain the standard procedures and discuss the implications of these procedures for estimation and inference. The issues are illustrated on data for a panel of 31 developing countries, 1966–90.