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The purchasing power parity in Australia: evidence from unit root test with structural break

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  • Olivier Darne
  • Jean-Francois Hoarau

Abstract

The unit root test with structural break developed by Perron and Rodriguez are used to study the purchasing power parity (PPP) in the spirit of Balassa-Samuelson in Australia for the period January 1977 to April 2004. The results indicate that there is a break in February 1985 which coincides with the exchange rate crisis in 1985, occurring after the establishment of the dirty flexible exchange rate system. We also show that there is no tendency to the PPP in Australia to hold in the long-run during this period.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 15 (2007)
Issue (Month): 3 ()
Pages: 203-206

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Handle: RePEc:taf:apeclt:v:15:y:2007:i:3:p:203-206

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References

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  1. Lopez, Claude & Murray, Christian J & Papell, David H, 2005. "State of the Art Unit Root Tests and Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 361-69, April.
  2. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  3. 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, vol. 20(1), pages 25-44, January.
  4. Perron, Pierre & Ng, Serena, 1996. "Useful Modifications to Some Unit Root Tests with Dependent Errors and Their Local Asymptotic Properties," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 435-63, July.
  5. PERRON, Pierre & RODRIGUEZ, Gabriel, 1998. "GLS Detrending, Efficient Unit Root Tests and Structural Change," Cahiers de recherche 9809, Universite de Montreal, Departement de sciences economiques.
  6. Alan M. Taylor & Mark Taylor, 2004. "The Purchasing Power Parity Debate," Working Papers 46, University of California, Davis, Department of Economics.
  7. Olekalns, Nilss & Wilkins, Nigel, 1998. "Re-examining the Evidence for Long-Run Purchasing Power Parity," The Economic Record, The Economic Society of Australia, vol. 74(224), pages 54-61, March.
  8. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  9. Papell, David H. & Prodan, Ruxandra, 2006. "Additional Evidence of Long-Run Purchasing Power Parity with Restricted Structural Change," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1329-1349, August.
  10. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  11. Henry, Olan T. & Olekalns, Nilss, 2002. "Does the Australian dollar real exchange rate display mean reversion," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 651-666, October.
  12. Franses, Philip Hans & Haldrup, Niels, 1994. "The Effects of Additive Outliers on Tests for Unit Roots and Cointegration," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 471-78, October.
  13. Jussi Tolvi, 2001. "Outliers in eleven Finnish macroeconomic time series," Finnish Economic Papers, Finnish Economic Association, vol. 14(1), pages 14-32, Spring.
  14. Lee, Junsoo & Strazicich, Mark C, 2001. " Break Point Estimation and Spurious Rejections with Endogenous Unit Root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(5), pages 535-58, December.
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Cited by:
  1. Cuestas, Juan C. & Gil-Alana, Luís A., 2009. "Further evidence on the PPP analysis of the Australian dollar: Non-linearities, fractional integration and structural changes," Economic Modelling, Elsevier, vol. 26(6), pages 1184-1192, November.
  2. Juan Carlos Cuestas & Paulo Jose Regis, 2008. "Testing for PPP in Australia: evidence from unit root tests against nonlinear trend stationarity alternatives," Working Papers 2008/3, Nottingham Trent University, Nottingham Business School, Economics Division.
  3. repec:ebl:ecbull:v:3:y:2008:i:27:p:1-8 is not listed on IDEAS

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