Towards resolving the Purchasing Power Parity (PPP) ‘puzzle’ in Newly Industrialized Countries (NIC’s)

David de Villiers () and Andrew Phiri
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David de Villiers: Department of Economics, Nelson Mandela University

No 1908, Working Papers from Department of Economics, Nelson Mandela University

Abstract: The Purchasing Power Parity (PPP) hypothesis represents one of the oldest existing economic doctrines and is plagued with empirical inconsistencies collectively labelled as ‘puzzles’. Our study resolves these ‘puzzles’ for 14 Newly Industrialized Countries (NIC) whose developmental strategies are impinged on the stability of real exchange rates which, in turn, validates the PPP hypothesis. We test for the stationarity of real exchange rates (RER’s) by applying an exponential smooth transition autoregressive unit root test augmented with a fractional frequency flexible Fourier form component (ESTAR-FFFFF) to capture heterogeneous smooth transition asymmetries and approximate unknown structural breaks in the time series. We find the RER’s in all 14 NIC’s are mean-reverting over monthly period of 1970:1-2018:12 which confirms the PPP hypothesis for these economies in the presence of exchange-rate regime shifts, oil and food shocks, financial crisis and other forms of asymmetries and structural breaks. Length: 29 pages

Keywords: Purchasing power parity (PPP); fractional frequency flexible Fourier form (FFFFF) unit root tests; asymmetries; structural breaks; Emerging economies; New Industrialized Countries (NIC). (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 C24 C58 F31 (search for similar items in EconPapers)
Date: 2019-09, Revised 2019-09
New Economics Papers: this item is included in nep-opm
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