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A century of PPP: supportive results from nonlinear unit root tests

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  • Mohsen Bahmani-Oskooee
  • Ali M. Kutan
  • Su Zhou

Abstract

In this paper, we test Purchasing Power Parity (PPP) by applying a new unit root test that allows for nonlinearity in the data to the real exchange rates, constructed with a century of data of 20 countries from Taylor (2002). The problem of lag selection has been taken into account in testing as recommended by Lopez et al. (2005), who challenged Taylor's conclusion that PPP holds well over the 20th century. The results support PPP in 16 out of 19 cases when the US dollar is used as base currency, a result much closer to Taylor (2002) than Lopez et al. (2005) and in line with Wallace and Shelley (2006).

Suggested Citation

  • Mohsen Bahmani-Oskooee & Ali M. Kutan & Su Zhou, 2009. "A century of PPP: supportive results from nonlinear unit root tests," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 11(1), pages 19-27.
    • Handle: RePEc:ids:gbusec:v:11:y:2009:i:1:p:19-27
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Lucio Sarno, 2005. "Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(3), pages 673-708, August.
    3. Papell, David H & Theodoridis, Hristos, 2001. "The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 790-803, August.
    4. Bahmani-Oskooee, Mohsen & Kutan, Ali M. & Zhou, Su, 2007. "Testing PPP in the non-linear STAR framework," Economics Letters, Elsevier, vol. 94(1), pages 104-110, January.
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    Cited by:

    1. repec:ebl:ecbull:v:6:y:2007:i:31:p:1-9 is not listed on IDEAS
    2. Frederick Wallace, 2013. "Cointegration tests of purchasing power parity," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 149(4), pages 779-802, December.
    3. repec:ebl:ecbull:v:6:y:2008:i:33:p:1-8 is not listed on IDEAS

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