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A century of PPP: supportive results from nonlinear unit root tests

Mohsen Bahmani-Oskooee (), Ali Kutan () and Su Zhou

Global Business and Economics Review, 2009, vol. 11, issue 1, 19-27

Abstract: In this paper, we test Purchasing Power Parity (PPP) by applying a new unit root test that allows for nonlinearity in the data to the real exchange rates, constructed with a century of data of 20 countries from Taylor (2002). The problem of lag selection has been taken into account in testing as recommended by Lopez et al. (2005), who challenged Taylor's conclusion that PPP holds well over the 20th century. The results support PPP in 16 out of 19 cases when the US dollar is used as base currency, a result much closer to Taylor (2002) than Lopez et al. (2005) and in line with Wallace and Shelley (2006).

Keywords: purchasing power parity; PPP; nonlinearity; unit roots; exchange rates; lag selection. (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:ids:gbusec:v:11:y:2009:i:1:p:19-27