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The Purchasing Power Parity in The Maghreb Countries : A Nonlinear Perspective

  • Benbouziane, Mohamed
  • Benamar, Abdelhak

The main objective of this paper is to test the validity of the purchasing power parity in the Maghreb countries (namely, Algeria, Morocco and Tunisia). We apply the threshold autoregressive non-linear model (TAR) proposed by Caner and Hansen (2001). First, a review of literature on PPP is presented, analysing its empirical validity and the econometric techniques that have been applied. After that, and investigating for the joint hypothesis of nonlinearity and non-stationarity in the exchange rate behaviour, the TAR model is presented and used for the PPP in the Maghreb countries. The results indicate that the RER shows nonlinear behaviour. Moreover, The Moroccan Tunisian (DH/DT) bilateral exchange rate is found to be highly persistent and follows a random walk, whereas the two others(Algerian Moroccan and Algerian Tunisian bilateral real exchange rates) are characterised by partial unit roots. This implies that PPP holds in one threshold regime but not in the other.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13853.

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Date of creation: 2006
Date of revision: 2007
Handle: RePEc:pra:mprapa:13853
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  1. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," SSE/EFI Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
  2. 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.
  3. 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.
  4. Enders, Walter & Granger, C. W. J., 1998. "Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Staff General Research Papers 1388, Iowa State University, Department of Economics.
  5. Frédérique BEC & Mélika BEN SALEM & Ronald MACDONALD, 2006. "Real exchange rates and real interest rates : a nonlinear perspective," Discussion Papers (REL - Recherches Economiques de Louvain) 2006024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  7. 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.
  8. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  9. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  10. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 5.
  11. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  12. Bruce E. Hansen & Mehmet Caner, 1997. "Threshold Autoregressions with a Unit Root," Boston College Working Papers in Economics 381, Boston College Department of Economics.
  13. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
  14. Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June.
  15. Pippenger, John, 2004. "The Modern Theory of the LOP and PPP: Some Implications," University of California at Santa Barbara, Economics Working Paper Series qt60z886n7, Department of Economics, UC Santa Barbara.
  16. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  17. repec:cup:cbooks:9780521326162 is not listed on IDEAS
  18. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June.
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