Investigating Purchasing Power Parity using three Panel Data Techniques: Evidence from 20 OECD Countries

Tsuyoshi Kubota

Doctoral Program in Policy and Planning Sciences, University of Tsukuba

Abstract

Using panel data techniques, this paper examines whether purchasing power parity (PPP) is empirically observed. We focus not on a time series analysis of each country pair, but on the variation of PPP using the entire 20-country data set. The results of this paper are summarized as follows. In terms of absolute PPP, the consumer price index (CPI) and the wholesale price index (WPI) identically reject the null hypothesis that PPP holds. In terms of relative PPP, the PPP hypothesis is accepted using the WPI, but rejected using the CPI, which is consistent with the results of time series analyses. Thus, relative PPP is empirically observed using panel data analysis in relatively short-run data, even when rejected by time series analysis in longer run data. This result is identical to those of previous studies on PPP.