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Testing for PPP in Australia: Evidence from unit root test against nonlinear trend stationarity alternatives

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  • Juan Carlos Cuestas

    ()
    (Nottingham Trent University)

  • Paulo José Regis

    ()
    (University of Nottingham)

Abstract

This paper tests for the empirical fulfilment of PPP in Australia (1977-2004). Previous research focuses on the presence of structural breaks and fails to find any support for PPP (Darne and Hoarau, 2008, Henry and Olekalns, 2002). In contrast, we find that the real exchange rate is stationary once we account for a more general specification of the nonlinear deterministic components based on a Chebishev polynomials approximation.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 3 (2008)
Issue (Month): 27 ()
Pages: 1-8

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Handle: RePEc:ebl:ecbull:eb-08c20010

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Keywords: PPP;

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  1. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 25-44, January.
  2. Ata Assaf, 2006. "Nonlinear Trend Stationarity in Real Exchange Rates: Evidence from Nonlinear ADF tests," Annals of Economics and Finance, Society for AEF, vol. 7(2), pages 283-294, November.
  3. Hegwood, Natalie D & Papell, David H, 1998. "Quasi Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 3(4), pages 279-89, October.
  4. PERRON, Pierre & RODRIGUEZ, Gabriel, 1998. "GLS Detrending, Efficient Unit Root Tests and Structural Change," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9809, Universite de Montreal, Departement de sciences economiques.
  5. Perron, Pierre & Phillips, Peter C. B., 1987. "Does GNP have a unit root? : A re-evaluation," Economics Letters, Elsevier, Elsevier, vol. 23(2), pages 139-145.
  6. Granger, Clive W. J. & Terasvirta, Timo, 1993. "Modelling Non-Linear Economic Relationships," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198773207, October.
  7. Mark Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(1-2), pages 1-17.
  8. Olivier Darne & Jean-Francois Hoarau, 2007. "The purchasing power parity in Australia: evidence from unit root test with structural break," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 15(3), pages 203-206.
  9. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9421, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  10. Robert Sollis, 2004. "Evidence on purchasing power parity from univariate models: the case of smooth transition trend-stationarity," Money Macro and Finance (MMF) Research Group Conference 2003, Money Macro and Finance Research Group 91, Money Macro and Finance Research Group.
  11. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1397-1417, November.
  12. Mariam Camarero & Juan Carlos Cuestas & Javier Ordonez, 2008. "Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 30-46.
  13. David O. Cushman, 2008. "Real exchange rates may have nonlinear trends," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 13(2), pages 158-173.
  14. Juan Carlos Cuestas, 2009. "Purchasing power parity in Central and Eastern European countries: an analysis of unit roots and nonlinearities," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(1), pages 87-94.
  15. Henry, Olan T. & Olekalns, Nilss, 2002. "Does the Australian dollar real exchange rate display mean reversion," Journal of International Money and Finance, Elsevier, Elsevier, vol. 21(5), pages 651-666, October.
  16. Mark, Nelson C., 1990. "Real and nominal exchange rates in the long run: An empirical investigation," Journal of International Economics, Elsevier, Elsevier, vol. 28(1-2), pages 115-136, February.
  17. Bierens, Herman J., 1997. "Testing the unit root with drift hypothesis against nonlinear trend stationarity, with an application to the US price level and interest rate," Journal of Econometrics, Elsevier, Elsevier, vol. 81(1), pages 29-64, November.
  18. Ardeni, Pier Giorgio & Lubian, Diego, 1991. "Is there trend reversion in purchasing power parity?," European Economic Review, Elsevier, Elsevier, vol. 35(5), pages 1035-1055, July.
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Cited by:
  1. Cuestas, Juan Carlos & Regis, Paulo José, 2013. "Purchasing power parity in OECD countries: Nonlinear unit root tests revisited," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 343-346.
  2. Juan Carlos Cuestas & Luís A. Gil-Alana, 2009. "Further evidence on the PPP analysis of the Australian dollar: non-linearities, fractional integration and structural changes," Working Papers, Nottingham Trent University, Nottingham Business School, Economics Division 2009/3, Nottingham Trent University, Nottingham Business School, Economics Division.
  3. Massimiliano Mazzanti & Antonio Musolesi, 2012. "Breaking Environmental Kuznets Curves. Evaluating Energy and Policy Time Events Effects on CO2 Trends for Advanced Countries," Working Papers 201214, University of Ferrara, Department of Economics.
  4. Mazzanti, M. & Musolesi, A., 2013. "Economic development and CO2 emissions: assessing the effect of policy and energy time events for advanced countries," Working Papers, Grenoble Applied Economics Laboratory (GAEL) 2013-11, Grenoble Applied Economics Laboratory (GAEL).
  5. Hakan Kum, 2012. "The Impact of Structural Break(s) on the Validity of Purchasing Power Parity in Turkey: Evidence from Zivot-Andrews and Lagrange Multiplier Unit Root Tests," International Journal of Economics and Financial Issues, Econjournals, vol. 2(3), pages 241-245.
  6. Václav Žďárek, 2012. "An Empirical Investigation of the Purchasing Power Parity Hypothesis in European Transition Countries," Prague Economic Papers, University of Economics, Prague, University of Economics, Prague, vol. 2012(3), pages 257-276.

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