Flexible Fourier stationary test in purchasing power parity for African countries

Chi-Wei Su, Hsu-Ling Chang and Meng-Nan Zhu

Applied Economics, 2012, vol. 44, issue 25, 3255-3262

Abstract: This study applies stationary test with a Fourier function proposed by Enders and Lee (2004, 2009) to test the validity of long run Purchasing Power Parity (PPP) to assess the nonstationary properties of the real exchange rate for 20 African countries. We find that our approximation has higher power to detect U shaped breaks and smooth breaks than linear method if the true data generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of PPP from the nonlinear point of view and provide robust evidence clearly indicate that PPP holds true for almost African countries. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.

Date: 2012
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DOI: 10.1080/00036846.2011.570729

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