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

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

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).

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Article provided by Inderscience Enterprises Ltd in its journal Global Business and Economics Review.

Volume (Year): 11 (2009)
Issue (Month): 1 ()
Pages: 19-27

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Handle: RePEc:ids:gbusec:v:11:y:2009:i:1:p:19-27
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  1. 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.
  2. Sarno, Lucio & Taylor, Mark P. & Chowdhury, Ibrahim, 2004. "Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 1-25, February.
  3. Alan M. Taylor, 2002. "A Century Of Purchasing-Power Parity," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 139-150, February.
  4. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  5. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 5.
  6. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
  7. 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.
  8. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
  9. Claude Lopez & David H. Papell, 2007. "Convergence to Purchasing Power Parity at the Commencement of the Euro," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 1-16, 02.
  10. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
  11. Bahmani-Oskooee, Mohsen & Das, Satya P, 1985. "Transaction Costs and the Interest Parity Theorem," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 793-99, August.
  12. Claude Lopez & Christian J. Murray & David H. Papell, 2004. "State of the Art Unit Root Tests and Purchasing Power Parity," University of Cincinnati, Economics Working Papers Series 2004-04, University of Cincinnati, Department of Economics.
  13. Lucio Sarno, 2005. "Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?," Working Papers wp05-11, Warwick Business School, Finance Group.
  14. Georgios Chortareas & George Kapetanios, 2003. "The Yen Real Exchange Rate May Be Stationary after All: Evidence from Nonlinear Unit-Root Tests," Working Papers 484, Queen Mary University of London, School of Economics and Finance.
  15. Sarantis, Nicholas, 1999. "Modeling non-linearities in real effective exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 27-45, January.
  16. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
  17. Hasan, Mohammad S., 2004. "Univariate time series behaviour of the real exchange rate: evidence from colonial India," Economics Letters, Elsevier, vol. 84(1), pages 75-80, July.
  18. Liew, Venus Khim-sen & Baharumshah, Ahmad Zubaidi & Chong, Terence Tai-leung, 2004. "Are Asian real exchange rates stationary?," Economics Letters, Elsevier, vol. 83(3), pages 313-316, June.
  19. Lucio Sarno, 2005. "Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 673-708, August.
  20. Cuddington, John T. & Liang, Hong, 2000. "Purchasing power parity over two centuries?," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 753-757, October.
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