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Towards resolving the Purchasing Power Parity (PPP) ‘puzzle’ in Newly Industrialized Countries (NIC’s)

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  • David de Villiers

    (Department of Economics, Nelson Mandela University)

  • Andrew Phiri

    (Department of Economics, Nelson Mandela University)

Abstract

The Purchasing Power Parity (PPP) hypothesis represents one of the oldest existing economic doctrines and is plagued with empirical inconsistencies collectively labelled as ‘puzzles’. Our study resolves these ‘puzzles’ for 14 Newly Industrialized Countries (NIC) whose developmental strategies are impinged on the stability of real exchange rates which, in turn, validates the PPP hypothesis. We test for the stationarity of real exchange rates (RER’s) by applying an exponential smooth transition autoregressive unit root test augmented with a fractional frequency flexible Fourier form component (ESTAR-FFFFF) to capture heterogeneous smooth transition asymmetries and approximate unknown structural breaks in the time series. We find the RER’s in all 14 NIC’s are mean-reverting over monthly period of 1970:1-2018:12 which confirms the PPP hypothesis for these economies in the presence of exchange-rate regime shifts, oil and food shocks, financial crisis and other forms of asymmetries and structural breaks. Length: 29 pages

Suggested Citation

  • David de Villiers & Andrew Phiri, 2019. "Towards resolving the Purchasing Power Parity (PPP) ‘puzzle’ in Newly Industrialized Countries (NIC’s)," Working Papers 1908, Department of Economics, Nelson Mandela University, revised Sep 2019.
    • Handle: RePEc:mnd:wpaper:1908
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    1. Stewart, Chris, 2023. "Re-evaluating whether absolute or relative purchasing power parity is being tested when using price indices," Economics Discussion Papers 2023-1, School of Economics, Kingston University London.

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    More about this item

    Keywords

    Purchasing power parity (PPP); fractional frequency flexible Fourier form (FFFFF) unit root tests; asymmetries; structural breaks; Emerging economies; New Industrialized Countries (NIC).;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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