The purchasing power parity revisited: new evidence for 16 OECD countries from panel unit root tests with structural breaks

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Abstract

In this paper, we apply a range of univariate unit root tests including the Lagrangian multiplier (LM) univariate and panel unit root tests to examine PPP for 16 OECD countries. In addition to incorporating structural breaks in the univariate exchange rate series, we also incorporate structural breaks in the panel exchange rate models. Our main finding from univariate tests, with and without structural breaks and panel LM test with one break, is that real exchange rates are not stationary, inconsistent with PPP hypothesis. However, when we incorporate two structural breaks in the univariate LM test, for most countries we find that real exchange rates are stationary. Moreover, we obtain overwhelming support for PPP when we apply panel LM unit root tests with two structural breaks.

Original languageEnglish
Pages (from-to)137-146
Number of pages10
JournalJournal of International Financial Markets, Institutions and Money
Volume18
Issue number2
DOIs
Publication statusPublished - Apr 2008
Externally publishedYes

Keywords

  • PPP
  • Real exchange rate
  • Unit root tests

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