Symmetry, proportionality and the purchasing power parity: Evidence from panel cointegration tests

This paper investigates the long-run Purchasing Power Parity hypothesis in a dynamic panel of twenty OECD countries, using recently developed heterogeneous panel cointegration tests. An important contribution of the paper is that it investigates the symmetry and proportionality conditions in PPP using likelihood-based inference as suggested by Johansen [Johansen S., 1995, Likelihood inference in cointegrated vector auto-regression models, Oxford University Press.], but with likelihood ratio tests extended to a panel context. We find empirical support for the weak form of the long-run PPP relationship, with the assumptions of symmetry and proportionality being strongly rejected.