The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity.

We investigate the implications of the choice of numeraire currency on panel tests of Purchasing Power Parity under the current regime of flexible exchange rates by conducting panel unit root tests with twenty-one different base currencies. We show that the conditions necessary for numeraire irrelevancy are not supported empirically, and that the choice of numeraire currency can and does matter for PPP. The evidence of PPP is stronger for European than for non-European base currencies. Distance between the countries and volatility of the exchange rates are the most important determinants of the results.