Using the Banerjee, Marcellino and Osbat (2005) quarterly data set on real exchange rate for 18 OECD countries over the period 1975:1-2002:4.

(a) Replicate the panel unit root test in Table 12.1 with Germany as the numeraire. Check the sensitivity of these results to a user-specified lag of 1, 2, 3, and 4. Compare with Table 8 of Banerjee, Marcellino and Osbat (2005).

(b) Perform the panel unit root test as in Table 12.1 but now with the U.S. as the numeraire. Check the sensitivity of these results to a user-specified lag of 1,2, 3, and 4. Compare with Table 8 of Banerjee, Marcellino and Osbat (2005).

(c) Perform the individual ADF unit root tests on a country-by- country basis for both parts (a) and (b). Compare with Table 7 of Banerjee, Marcellino and Osbat (2005). What do you conclude?

(d) Check the sensitivity of the results in parts (a) and (b) when both individual effects and individual linear trends are included.

(e) Perform the Pesaran (2007) CIPS test and the Bai and Ng (2004) unit root test. What do you conclude?

Table 12.1:

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Cross- Method Statistic Prob.** sections Obs Null: Unit root (assumes common unit root process) Levin, Lin & Chu t* Breitung t-stat -1.83839 0.0330 18 1970 -3.06048 0.0011 18 1952 Null: Unit root (assumes individual unit root process) Im, Pesaran and Shin W-stat -3.42675 0.0003 18 1970 ADF - Fisher Chi-square 63.6336 0.0030 18 1970 PP - Fisher Chi-square 58.1178 0.0112 18 1998 Null: No unit root (assumes common unit root process) Hadri Z-stat 9.43149 0.0000 18 2016