Fully Modified OLS for Heterogeneous Cointegrated Panels and the Case of Purchasing Power Parity

-----------------------------------------------------------------------------------------------------------------Abstract: Using fully modified OLS principles, methods are developed for estimating and testing hypotheses for cointegrating vectors in heterogeneous panels which lead to asymptotically unbiased and nuisance parameter free standard distributions in the presence of idiosyncratic dynamics and fixed effects. Small sample properties are also investigated by Monte Carlo simulation under a variety of scenarios for the error processes. Finally, by way of illustration, the estimators are employed to address an empirical puzzle which has developed in recent panel studies of the purchasing power parity hypothesis for the post Bretton Woods data. ------------------------------------------------------------------------------------------------------------------

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