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What Is New About the PPP Theory in the Nordic Countries? Evidence from Panel Unit Root Tests with Sharp Breaks and Gradual Shifts

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  • Mehmet DINÇ

    (Department of Economics, Faculty of Economics and Administrative Sciences, Ağrı İbrahim Çeçen University Campus, 04100, Ağrı, Türkiye.)

  • Mustafa GÖMLEKSIZ2

    (Corresponding author. Department of Economics, Faculty of Political Science, Necmettin Erbakan University, Köycegiz Campus, 42090, Meram, Konya, Türkiye.)

  • Özlem Gül DINÇ

    (Ağrı İbrahim Çeçen University Campus C1-3 No:16, 04100, Ağrı, Türkiye.)

Abstract

The Purchasing Power Parity (PPP) theory simply refers to a rate of exchange that eliminates price level differences between countries, equalizing the purchasing power of different currencies. The theory provides some essential tools in determining exchange rates and equilibrium conditions. This study investigates the long run validity of the PPP in five Nordic countries over the monthly data in the 1976-2019 period. We use a panel LM unit root test to detect sharp breaks as well as a novel method based on the Fourier approximation taking into account gradual shifts in the real exchange rates. Firstly, despite the past evidence, results of the panel unit root test with sharp break are mostly consistent with the PPP relationship in the group of Nordic countries. Secondly, we obtain mixed results from the Fourier panel stationarity test based on the number of frequencies, implying notable evidence for the PPP in the whole and pre-Euro periods. Taking together results of the two tests, it is possible to conclude that an empirical approach which captures the nature of structural change in price adjustments is more preferable as compared to conventional tests.

Suggested Citation

  • Mehmet DINÇ & Mustafa GÖMLEKSIZ2 & Özlem Gül DINÇ, 2022. "What Is New About the PPP Theory in the Nordic Countries? Evidence from Panel Unit Root Tests with Sharp Breaks and Gradual Shifts," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 165-186, April.
    • Handle: RePEc:rjr:romjef:v::y:2022:i:2:p:165-186
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    References listed on IDEAS

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    More about this item

    Keywords

    Purchasing power parity; Nordic countries; panel LM unit root test; Fourier approximation;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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