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Nonlinear approaches in testing PPP: Evidence from Southern African development community

Mulatu Zerihun () and Marthinus Breitenbach ()

Economic Modelling, 2016, vol. 56, issue C, 162-167

Abstract: In this paper two nonlinearity tests are employed: the nonparametric test developed by Brock, Dechert and Scheinkman — known as the BDS test and the Fourier stationarity test. The BDS non-linearity test detects whether the independent and identically distribute (iid) assumption of the time series used in the analysis holds true or not while the Fourier approximation mimics a wide variety of breaks and other types of nonlinearities. Both tests confirm the non-linear nature of real exchange series in the Southern African Development Community (SADC). The result from the Fourier stationary test further provides strong evidence of an optimal currency area (OCA) among the 11 SADC countries included in this study.

Keywords: Optimal currency area; Purchasing power parity; Real exchange rate; Fourier; Stationary test (search for similar items in EconPapers)
JEL-codes: C22 C32 F15 F31 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.econmod.2016.04.002

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