PPP in the 34 OECD countries: evidence from quantile-based unit root tests with both smooth and sharp breaks

Conventional unit root tests have mostly failed to validate the PPP. Quantile-based unit root tests by previous research have provided some support for the PPP. In this article, we take an additional step and incorporate sharp shifts and smooth breaks into the quantile-based unit root test and re-examine the PPP in each of the 34 OECD countries over the period 1994:01–2016:03. We find support for the PPP in 18 countries of Austria, Chile, Estonia, Finland, France, Germany, Italy, Korea, Mexico, Netherlands, New Zealand, Poland, Portugal, Slovenia, Sweden, Switzerland, Turkey and the United Kingdom.     

Assessment of innovation and foreign direct investment: An investigation of OECD countries

Using a panel cointegration method incorporating structural breaks and cross-sectional dependence, this paper explores the long-run equilibrium relationship between innovation and foreign direct investment (FDI) in 30 OECD countries. The results from the panel stationary test show that FDI and innovation variables follow a stationary process with several structural breaks over the period 1999–2018. The results also suggest an equilibrium relationship with structural breaks between FDI and innovation in OECD countries. The panel dynamic OLS model with breaks further reveals that FDI is positively associated with innovation performance and vice versa in OECD countries. Therefore, this paper sheds light on the relationship between FDI and innovation in OECD countries.     

REAL INTEREST RATE PARITY AND FOURIER QUANTILE UNIT ROOT TEST

Real interest rate differentials usually exhibit two properties; structural breaks and asymmetric dynamics. In this paper, we use various types of Quantile Unit Root Test (QURT) which accounts for both properties. Unlike previous research, we reject the unit root in the real interest rate differentials in 18 out of 21 OECD countries as well as in 4 out of 5 BRICS countries using QURT with sharp and smooth breaks.     

Revisiting purchasing power parity for African countries: with nonlinear panel unit-root tests

This study applies Panel Seemingly Unrelated Regressions (SUR) Kapetanios et al. (Kapetanios–Shin–Snell (KSS), SURKSS) tests, proposed by Wu and Lee (2009), to investigate the properties of long-run Purchasing Power Parity (PPP) in 15 African countries. The empirical results from the univariate unit root and panel based unit root tests indicate that PPP does not hold for these 15 countries under study. However, Panel SURKSS tests indicate that PPP is valid for four of these 15 countries. These results have important policy implications for these 15 African countries under study.     

Removal of farm subsidies in a regional economy: a computable general equilibrium analysis

There are a number of studies that examine the purchasing power parity (PPP) hypothesis. The empirical findings from the extant literature for the PPP hypothesis are mixed. This article applies univariate and panel Lagrange Multiplier (LM) unit root tests with one and two structural breaks to real exchange rates for 15 Asian countries. The univariate LM unit root tests find evidence of PPP for two-thirds of the sample. The results from the panel LM unit root test support long-run PPP for the Asian countries in the sample. The results from the LM panel unit root tests differ from those of existing panel unit root tests of PPP for Asian countries that have not allowed for the existence of structural breaks.     

The behavior of Turkish exchange rates: A panel data perspective

This paper investigates the behavior of Turkish exchange rates within the context of purchasing power parity (PPP) hypothesis by means of recent developments in the panel unit root testing procedures for ten Turkish real exchange rates during January 2002–May 2012. The unit root test which accounts for nonlinearity, smooth structural shifts, and cross-section dependency supports that PPP hypothesis holds for Eurozone and European countries (Denmark, Norway, Sweden, Switzerland, and United Kingdom), while it does not hold for non-European trading partners (Canada, Japan, Saudi Arabia, and USA). From the empirical results, we can conclude that PPP hypothesis holds in the countries which have the free trade agreement, while it is violated in the countries in which there are trade barriers and greater distance. The findings therefore provide policy implications for Turkey in determining equilibrium exchange rates with her major trading partners.     

Investigating stationarity in tourist arrivals to India using panel KPSS with sharp drifts and smooth breaks

In the study, we applied panel-based stationary test that incorporates sharp as well as smooth breaks to investigate the non-stationarity of long-run tourists’ arrivals to India from major tourists’ source countries for the period 1981–2012. Results from the overall panel data provided significant evidence to support the stationarity hypothesis. However, when tourist arrivals from major source countries are considered, results indicate that tourist arrivals in India from the UK, Canada, Australia, Singapore, and Nepal were non-stationary, suggesting that tourists from these countries are all affected by economic conditions with the greatest extent. The results of the study have important policy implication for the tourist authority of India as well as business sectors in the hospitality industry for understanding and predicting market condition.     

Are OECD consumption–income ratios stationary after all?

This paper investigates the stochastic properties of the consumption–income ratio for a sample of 23 OECD countries over the period 1960–2005. For that purpose, we employ a battery of recently developed panel unit root and stationarity tests. Our findings from panel unit root tests which do not control for structural breaks appear in line with those from previous studies since they are clearly supportive of the unit root hypothesis. In stark contrast stand the results obtained from the application of a panel stationarity test with multiple breaks, which support the existence of regime-wise stationarity in OECD consumption–income ratios once we control for cross-sectional dependence through bootstrap methods. These findings are reinforced by the median-unbiased estimates of half-lives obtained from impulse-response functions which are found to be finite for the 23 OECD countries.     

Do per capita health care expenditures converge among OECD countries? Evidence from unit root tests with level and trend-shifts

This study examines the stochastic conditional convergence of per capita health care expenditures (PCHCE) among 19 OECD countries over the period 1972–2008. Specifically, newly developed LM and RALS-LM unit root tests with allowance for two endogenously determined structural breaks are employed. The results indicate support for PCHCE convergence among most OECD countries. The results are stronger in more general tests that control for two breaks and nonnormal errors. Panel unit root tests provide additional support for the stochastic convergence of PCHCE.     

Testing PPP hypothesis under temporary structural breaks and asymmetric dynamic adjustments

ABSTRACT

We test the empirical validity of the PPP proposition under temporary structural breaks and dynamic nonlinear adjustments. Although several testing procedures have recently been proposed in the existing literature to investigate stochastic properties of the series under gradual breaks and nonlinear adjustments, none of these tests are compatible with the PPP proposition. Therefore, we propose new testing procedures that restrict the break to be temporary while simultaneously allowing for asymmetric dynamic nonlinear adjustment towards equilibrium. Using these newly proposed tests, we test stationarity of real exchange rate of 24 OECD countries vis-à-vis USA, and find support in favour of PPP proposition in majority of the countries.     

Purchasing power parity for 15 Latin American countries: Panel SURKSS test with a Fourier function

This study applies Panel SURKSS test with a Fourier function to investigate the properties of long-run purchasing power parity (PPP) in fifteen Latin American countries over the period of December 1994 to February 2010. The empirical results from the univariate unit root and panel-based unit root tests indicate that PPP does not hold for these fifteen countries under study. However, results from the Panel SURKSS test with a Fourier function indicate that PPP is valid for these fifteen countries, with the exception of Honduras. Our results highlight the importance of incorporating both nonlinearities and structural breaks when testing the validity of long-run PPP. These results have important policy implications for these fifteen Latin American countries under study.     

Purchasing power parity revisited: evidence from old and new tests for an organisation for economic co-operation and development panel

The objective of this article is to study long-run Purchasing Power Parity (PPP) for a panel of 21 Organisation for Economic Co-operation and Development (OECD) countries from the end of the Bretton Woods era by applying a wide range of the econometric techniques available. This will allow us to present a comprehensive up to date examination of the empirical validity of PPP, covering the weak and strong versions of the hypothesis with individual and panel analysis, including the absence or presence of cross-dependency, the linear or nonlinear behaviour of the real exchange rates and the degree of persistence. Overall, the results provide evidence in favour of PPP.     

The Feldstein–Horioka puzzle in groupings of OECD members: A panel approach

This paper investigates the relationship between investment and savings in 26 OECD countries and demonstrates that the relationship changes when the countries under consideration in the selected panel vary. Accordingly, panel estimations using annual data for the period from 1970 to 2008 have been made for various groupings of developed countries, specifically the OECD as a whole, the EU15, NAFTA and the G7. Additionally, the paper examines changes in investment savings relationships when the presence of structural shifts in developed countries – where such exist – are taken into account. Recently developed panel techniques are employed to examine the investment savings relationship and estimate saving-retention coefficients. The empirical findings reveal that the Feldstein–Horioka puzzle exists only in the panel of G7 countries, wherein the saving-retention coefficient is estimated as 0.754 and 0.864 (for the full sample of G7 countries and for stable G7 countries, respectively). The estimated saving-retention coefficient for unstable G7 countries is 0.482, which indicates a higher level of capital mobility in unstable countries with respect to stable ones. This conclusion is further supported by the estimations for OECD countries and the EU15.     

HYSTERESIS IN UNEMPLOYMENT REVISITED: EVIDENCE FROM PANEL LM UNIT ROOT TESTS WITH HETEROGENEOUS STRUCTURAL BREAKS

This paper applies the panel LM unit root tests with heterogeneous structural breaks in level by Im  et al. ( Oxford Bulletin of Economics and Statistics , 67 (2005), pp. 393–419) to re-examine the validity of hysteresis in the unemployment rates of 19 OECD countries. Our empirical findings are favourable to the stationarity of the unemployment rates, i.e., the unemployment hysteresis hypothesis is strongly rejected. Our results suggest that shocks to unemployment rates are temporary and soon converge when we control for breaks. A major policy implication of the study is that a fiscal or monetary stabilization policy would not have permanent effects on the unemployment rates of the 19 OECD countries.     

Revisiting purchasing power parity in G6 countries: an application of smooth time-varying cointegration approach

This study revisits purchasing power parity (PPP) for the G6 countries (i.e., Canada, Italy, Japan, France, Germany, the UK) using smooth time-varying cointegrating approach, proposed by Park and Hahn (Econom Theory 15:664–703, 1999). Using monthly data over the 1971M1–2013M12 period, our empirical results indicate that PPP holds in two out of six countries (i.e., France and Germany).     

RIGHT ON TARGET: EXPLORING THE FACTORS LEADING TO INFLATION TARGETING ADOPTION

This paper examines which economic, fiscal, external, financial, and institutional characteristics of countries affect the likelihood that they adopt inflation targeting (IT) as their monetary policy strategy. We estimate a panel binary response model for 60 countries and two subsamples consisting of Organization for Economic Cooperation and Development (OECD) and non‐OECD countries over the period 1985–2008. The findings suggest that past macroeconomic performance of a country, its fiscal discipline, exchange rate arrangements, as well as the structure and development of its financial system have a significant impact on the likelihood to adopt IT. However, the factors leading to IT adoption differ significantly between OECD and non‐OECD countries. (JEL E42, E52)     

AN ATTEMPT TO EXPLAIN DIFFERENCES IN ECONOMIC GROWTH: A STOCHASTIC FRONTIER APPROACH

Total factor productivity (TFP), factor accumulation, and growth are analysed for a panel of 40 countries in 2001–11. TFP growth and technical inefficiency are estimated using a stochastic frontier model. Environmental variables are found to have an important role in explaining differences in inefficiency across countries. Over 2001–11, the general improvement in technical efficiency of countries is almost outweighed by technological regress. Results indicate that differences in factor accumulation between OECD and emerging economies are more important than differences in TFP change to explain differences in economic growth. Results also indicate negative and significant random shocks for the OECD countries.     

Fourier nonlinear quantile unit root test and PPP in Africa

We test the PPP hypothesis in 29 African countries using a newly developed nonlinear Quantile unit root test with a Fourier function which accounts for smooth breaks. Simulation indicates that the proposed new test has higher power than the conventional Quantile unit root test as proposed by Koneker and Xiao (2004). Our empirical results provide support for the PPP hypothesis in 21 out of 29 African countries, a unique discovery using their real effective exchange rates. It appears that incorporating Fourier function to nonlinear Quantile unit root test gets us closer and closer to solving the PPP puzzle in Africa.     

Revisit causal nexus between military spending and debt: A panel causality test

This study revisits the causal relationship between military spending and debt burden in 11 OECD countries via a panel causality analysis that accounts for both cross-sectional dependence and heterogeneity across countries. Our empirical results indicate unidirectional causality from military spending to debt burden for Japan, Portugal, and the US; one-way causality from debt burden to military spending for both Canada and the UK; bidirectional causality for Spain; and for the rest of countries, we do not find any relationship between military spending and debt burden. The empirical evidence does not provide consistent results regarding the causal relationship between military spending and debt burden in these 11 OECD countries.     

FINANCIAL DEVELOPMENT AND THE FDI‐INEQUALITY NEXUS

This article empirically investigates whether the link between foreign direct investment (FDI) and income inequality varies with financial development. Using a smooth transition regression model to a panel of developing and advanced countries over the period of 1976–2005, the results indicate that financial development indeed defines the relationship between FDI and inequality. FDI raises income inequality and the effect becomes stronger in magnitude with financial sophistication. The results also indicate a large variation in the FDI effect across countries and over time, contingent on financial development. (JEL C23, F40, O15)