Heterogeneous panel unit root tests and purchasing power parity

Doubts have been raised recently on the findings of panel studies of purcha sing power parity (PPP) on the grounds that they ignore serial correlation and cross-sectional dependence, and consequently suffer from severe size bi ases and loss of power. We implement an alternative panel unit root test th at controls for serial correlation and cross-sectional dependence as well a s the heterogeneity of dynamics and error variances across groups, and find strong support for PPP. Our findings are consistent with other recent stud ies on the subject.