The Validity of PPP Revisited: An Application of Non-linear Unit Root Test

Liew, Venus Khim-Sen (2003) The Validity of PPP Revisited: An Application of Non-linear Unit Root Test. Munich Personal RePEc Archive. pp. 1-11. ISSN 2285-6803

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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.

Item Type: Article
Uncontrolled Keywords: Purchasing power parity; Mean reversion; ASEAN economies; Real exchange rates; Non-linear unit root, unimas, university, universiti, Borneo, Malaysia, Sarawak, Kuching, Samarahan, ipta, education, research, Universiti Malaysia Sarawak
Subjects: H Social Sciences > HB Economic Theory
Divisions: Academic Faculties, Institutes and Centres > Faculty of Economics and Business
Depositing User: Ab Rahim
Date Deposited: 27 Nov 2017 06:10
Last Modified: 27 Nov 2017 06:10

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