The Validity of PPP Revisited: An Application of Non-linear Unit Root Test
To this end, the validity of purchasing power parity (PPP) remains a controversial issue, as empirical evidence is inconclusive. This study provides robust empirical evidence to support the view that negligence of non-linearity may be the culprit of these contrasting findings. This paper demonstrates that the non-linear unit root test proposed by Kapetanois et al. [Journal of Econometrics, 2003, 112, pp.359-379] is able to reject unit root in 4 out of 5 cases, implying that deviations of exchange rates is mean reverting towards the PPP equilibrium values from the non-linear perspective, whereas the augmented Dickey-Fuller (ADF) test fails in 4 out of 5 cases. Thus, previous conclusions of the invalidity of PPP may be due to misleading results from the ADF test, which has low power against non-linearity.
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.:
- William Barnett & Apostolos Serletis, 2012.
"Martingales, Nonlinearity, And Chaos,"
WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS
201225, University of Kansas, Department of Economics, revised Sep 2012.
- Jun Nagayasu, 1998. "Does the Long-Run Ppp Hypothesis Hold for Africa? Evidence From Panel Co-Integration Study," IMF Working Papers 98/123, International Monetary Fund.
- 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.
- Hsieh, David A, 1989. "Testing for Nonlinear Dependence in Daily Foreign Exchange Rates," The Journal of Business, University of Chicago Press, vol. 62(3), pages 339-68, July.
- O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February.
- Venus Khim-Sen Liew & Terence Tai-Leung Chong & Kian-Ping Lim, 2003. "The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1387-1392.
- Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 1999.
"Long memory or structural breaks: can either explain nonstationary real exchange rates under the current float?,"
Journal of International Financial Markets, Institutions and Money,
Elsevier, vol. 9(4), pages 359-376, November.
- Christopher F. Baum & John T. Barkoulas & Mustafa Caglayan, 1998. "Long memory or structural breaks: Can either explain nonstationary real exchange rates under the current float?," Boston College Working Papers in Economics 380, Boston College Department of Economics.
- Christopher F. Baum & Mustafa Caglayan & John Barkoulas, 1998.
"Nonlinear Adjustment to Purchasing Power Parity in the post-Bretton Woods Era,"
Boston College Working Papers in Economics
404., Boston College Department of Economics, revised 16 Nov 1999.
- Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 2001. "Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 379-399, June.
- Charles Engel & Michael K. Hendrickson & John H. Rogers, 1997.
"Intra-national, intra-continental, and intra-planetary PPP,"
International Finance Discussion Papers
589, Board of Governors of the Federal Reserve System (U.S.).
- Charles Engel & Michael K. Hendrickson & John H. Rogers, 1997. "Intra-National, Intra-Continental, and Intra-Planetary PPP," NBER Working Papers 6069, National Bureau of Economic Research, Inc.
- Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February.
- Pesaran, M Hashem & Potter, Simon M, 1992. "Nonlinear Dynamics and Econometrics: An Introduction," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S1-7, Suppl. De.
- Corbae, Dean & Ouliaris, Sam, 1988. "Cointegration and Tests of Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 508-11, August.
- Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
- Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
- repec:att:wimass:9520 is not listed on IDEAS
- n/a, 2001. "Balance of payments prospects in EMU," NIESR Discussion Papers 164, National Institute of Economic and Social Research.
- Jerry Coakley & Ana-Maria Fuertes, 2001. "Nonparametric cointegration analysis of real exchange rates," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 1-8.
- Azali, M. & Habibullah, M. S. & Baharumshah, A. Z., 2001. "Does PPP hold between Asian and Japanese economies? Evidence using panel unit root and panel cointegration," Japan and the World Economy, Elsevier, vol. 13(1), pages 35-50, January.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- 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.
- Hali J. Edison & Eric Fisher, 1989.
"A long-run view of the european monetary system,"
International Finance Discussion Papers
339, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0308001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.