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The purchasing power parity revisited: New evidence for 16 OECD countries from panel unit root tests with structural breaks

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  • Narayan, Paresh Kumar

Abstract

In this paper, we apply a range of univariate unit root tests including the Lagrangian multiplier (LM) univariate and panel unit root tests to examine PPP for 16 OECD countries. In addition to incorporating structural breaks in the univariate exchange rate series, we also incorporate structural breaks in the panel exchange rate models. Our main finding from univariate tests, with and without structural breaks and panel LM test with one break, is that real exchange rates are not stationary, inconsistent with PPP hypothesis. However, when we incorporate two structural breaks in the univariate LM test, for most countries we find that real exchange rates are stationary. Moreover, we obtain overwhelming support for PPP when we apply panel LM unit root tests with two structural breaks.

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  • Narayan, Paresh Kumar, 2008. "The purchasing power parity revisited: New evidence for 16 OECD countries from panel unit root tests with structural breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 137-146, April.
    • Handle: RePEc:eee:intfin:v:18:y:2008:i:2:p:137-146
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    Cited by:

    1. Byrne, Joseph P. & Nagayasu, Jun, 2010. "Structural breaks in the real exchange rate and real interest rate relationship," Global Finance Journal, Elsevier, vol. 21(2), pages 138-151.
    2. Thomas L Bradley & Paul B Eberle, 2023. "Purchasing Power Parity In Russia And The Transitioning Economy 1990-1995," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 31, pages 85-111, June.
    3. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2011. "Unit-root and stationarity testing with empirical application on industrial production of CEE-4 countries," MPRA Paper 29648, University Library of Munich, Germany.
    4. Hiranya K. Nath & Jayanta Sarkar, 2014. "City Relative Price Dynamics in Australia: Are Structural Breaks Important?," The Economic Record, The Economic Society of Australia, vol. 90(288), pages 33-48, March.
    5. Ritesh Kumar Mishra & Sanjay Sehgal, 2011. "Exchange rates and prices in purchasing power parity framework: Are bilateral real exchange rates stationary?," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 4(3), pages 274-286.
    6. Mark Holmes & Jesús Otero & Theodore Panagiotidis, 2012. "PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-Sectional Dependency and Structural Breaks," Open Economies Review, Springer, vol. 23(5), pages 767-783, November.
    7. Snaith, Stuart, 2012. "The PPP debate: Multiple breaks and cross-sectional dependence," Economics Letters, Elsevier, vol. 115(3), pages 342-344.
    8. Ahmad Zubaidi Baharumshah & Siew-Voon Soon, 2012. "Mean reversion in bilateral real exchange rates: evidence from the Malaysian ringgit," Applied Economics, Taylor & Francis Journals, vol. 44(22), pages 2921-2933, August.
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    10. Kia, Amir, 2013. "Determinants of the real exchange rate in a small open economy: Evidence from Canada," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 163-178.
    11. Natalie D. Hegwood & Hiranya K. Nath, 2014. "Real exchange rate dynamics: Evidence from India," Economic Analysis and Policy, Elsevier, vol. 44(4), pages 396-404.
    12. Makin, Anthony J. & Ratnasiri, Shyama, 2015. "Competitiveness and government expenditure: The Australian example," Economic Modelling, Elsevier, vol. 49(C), pages 154-161.
    13. Hegwood, Natalie D. & Nath, Hiranya K., 2013. "Structural breaks and relative price convergence among US cities," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 150-160.
    14. Ali Acaravci & Ilhan Ozturk, 2010. "Testing Purchasing Power Parity in Transition Countries: Evidence from Structural Breaks," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(27), pages 190-198, February.
    15. Nilgün Çil Yavuz, 2009. "Purchasing power parıty with multiple structural breaks: evidence from Turkey," Economics Bulletin, AccessEcon, vol. 29(2), pages 1201-1210.
    16. Pei-Chien Lin & Ho-Chuan Huang, 2012. "Convergence in income inequality? evidence from panel unit root tests with structural breaks," Empirical Economics, Springer, vol. 43(1), pages 153-174, August.
    17. Joe Cox, 2008. "Purchasing power parity and cultural convergence: evidence from the global video games market," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 32(3), pages 201-214, September.
    18. Wen, Jun & Zhao, Xinxin & Fu, Qiang & Chang, Chun-Ping, 2023. "The impact of financial risk on green innovation: Global evidence," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).

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