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Testing for PPP in Australia: evidence from unit root tests against nonlinear trend stationarity alternatives

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Author Info
Juan Carlos Cuestas
Paulo Jose Regis

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Abstract

The aim of this paper is to analyse the empirical fulfilment of the PPP in Australia (1977-2004). Previous research focuses on the presence of structural breaks and fails to find any support to the PPP (Darne and Hoarau, 2008, Henry and Olekalns, 2002). In contrast, we find that the PPP hypothesis holds once we account for a more general specification of the Nonlinear Deterministic components based on a Chebishev polynomials approximation.

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Paper provided by Nottingham Trent University, Nottingham Business School, Economics Division in its series Working Papers with number 2008/3.

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Date of creation: Feb 2008
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Handle: RePEc:nbs:wpaper:2008/3

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Related research
Keywords: PPP; Real exchange rates; Unit roots; nonlinearities;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F15 - International Economics - - Trade - - - Economic Integration

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mark P. Taylor, 2006. "Real exchange rates and Purchasing Power Parity: mean-reversion in economic thought," Applied Financial Economics, Taylor and Francis Journals, vol. 16(1-2), pages 1-17, January. [Downloadable!] (restricted)
  2. David O. Cushman, 2008. "Real exchange rates may have nonlinear trends," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 158-173. [Downloadable!]
  3. Ardeni, Pier Giorgio & Lubian, Diego, 1991. "Is there trend reversion in purchasing power parity?," European Economic Review, Elsevier, vol. 35(5), pages 1035-1055, July. [Downloadable!] (restricted)
  4. Hegwood, Natalie D & Papell, David H, 1998. "Quasi Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-89, October. [Downloadable!] (restricted)
  5. Huizinga, John, 1987. "An empirical investigation of the long-run behavior of real exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 149-214, January. [Downloadable!] (restricted)
  6. Juan Carlos Cuestas & Javier Ordoñez & Mariam Camarero, 2007. "Nonlinear Trend Stationarity Of Real Exchange Rates: The Case Of The Mediterranean Countries," Working Papers. Serie AD 2006-27, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  7. Mark, Nelson C., 1990. "Real and nominal exchange rates in the long run: An empirical investigation," Journal of International Economics, Elsevier, vol. 28(1-2), pages 115-136, February. [Downloadable!] (restricted)
  8. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, vol. 56(6), pages 1397-1417, November. [Downloadable!] (restricted)
  9. 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, vol. 81(1), pages 29-64, November. [Downloadable!] (restricted)
  10. Juan Carlos Cuestas, 2007. "Purchasing Power Parity In Central And Eastern European Countries: An Analysis Of Unit Roots And Nonlinearities," Working Papers. Serie AD 2007-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  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. [Downloadable!] (restricted)
  12. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
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  13. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October. [Downloadable!] (restricted)
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  14. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-48, September. [Downloadable!] (restricted)
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  15. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July. [Downloadable!] (restricted)
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  16. Olivier Darné & Jean-François Hoarau, 2008. "The purchasing power parity in Australia: evidence from unit root test with structural break," Applied Economics Letters, Taylor and Francis Journals, vol. 15(3), pages 203-206. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Juan Carlos Cuestas & Estefania Mourelle, 2008. "Nonlinearities in real exchange rate determination: do African exchange rates follow a radom walk?," Working Papers 2008/8, Nottingham Trent University, Nottingham Business School, Economics Division. [Downloadable!]
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