Reexamining the PPP hypothesis: A nonlinear asymmetric heterogeneous panel unit root test

In this study, we re-examine the PPP hypothesis in the light of the new developments in the unit root testing literature. The recent theoretical findings have pointed out that the real exchange rate series exhibit asymmetric nonlinear behavior. A unit root test applied to analyze the PPP hypothesis therefore, should also take into account this asymmetry inherent in the real exchange rate. Different unit root tests that consider the presence of these data features have been developed in the time series literature. However, a true attempt to test the PPP hypothesis should take a panel data approach. To this end, we propose a nonlinear heterogeneous panel unit root test where the alternative hypothesis allows for symmetric or asymmetric exponential smooth transition autoregressive nonlinearity and provide its finite sample properties. We apply our test to the real exchange rates of the 15 European Union countries against the US dollar. While the results of the linear and symmetric nonlinear heterogeneous panel unit root tests are against the PPP hypothesis, the asymmetric nonlinear heterogeneous panel test that we propose gives support for the PPP hypothesis as expected. Therefore, the conclusions drawn from the linear panel unit root tests or the nonlinear panel unit root tests that do not take asymmetry into account might be misleading.     

Purchasing Power Parity and the European single currency: Some new evidence

The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency.     

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.     

Are PPP tests erratically behaved? Some panel evidence

This paper examines whether, in addition to standard unit root and cointegration tests, panel approaches also produce test statistics behaving erratically when applied to tests for Purchasing Power Parity (PPP). We show that if appropriate tests (which are robust to cross‐sectional dependence) are used, any evidence of erratic behaviour disappears, and empirical support is found for PPP.     

Digging out the PPP hypothesis: an integrated empirical coverage

We use several popular tests to test the validity of the Purchasing Power Parity (PPP) hypothesis. In particular, we analyze four classes of tests??standard univariate unit root tests, co-integration, panel unit root tests, and unit root tests for nonlinear frameworks??for a dataset consisting of 20 bilateral exchange rates. Through this approach, we ascertain the effectiveness of each methodology in assessing the validity of PPP. Overall, our results suggest little evidence to support PPP. Among the conducted tests, the Panel Analysis of Nonstationarity in the Idiosyncratic and Common components (PANIC) provides the richest insights by disentangling the possible sources of non-stationarity of real exchange rates. The relevance of using price indices with different characteristics is also pinpointed.     

Is there any evidence of tax-and-spend,spend-and-tax or fiscal synchronization from panel of Indian state?

We examine the government revenue and government expenditure nexus using a panel of 26 Indian states from 1980–1981 to 2014–2015. While most of the previous literature claims that revenue and expenditure series are non-stationary at level, we employ both Narayan and Popp two structural break and cross-sectional augmented Im-Pesaran-Shin (CIPS) panel unit root tests, and found two series are stationary. Further, our results derived from Dumitrescu–Hurlin panel causality test support the ‘fiscal synchronization’ hypothesis for Indian states. Finally, the revenue and expenditure of Indian state governments are segregated into revenue account and capital account, and again our results support the existence of ‘fiscal synchronization’ hypothesis.     

Testing for nonlinear panel unit roots under cross-sectional dependency — With an application to the PPP hypothesis

In this paper we propose a number of nonlinear panel unit root tests that are robust to cross-sectional dependency. These tests may be used to test the null hypothesis of non-stationarity against the alternative that some or all of the time series in the system of equations follow a stationary exponential smooth transition autoregressive (ESTAR) process. In contrast to previous research we relax the assumption that the cross-correlation structure is driven by a common-factor and consider an endogenous correlation structure. Based on the size and power results from the Monte Carlo simulations we recommend using the Wald version of our cross-sectional dependent robust nonlinear panel unit root (CDR-NPU) method.Finally, in an empirical application we demonstrate that our more powerful nonlinear method, in contrast to previous methods, can provide support for PPP even in smaller samples. In consistency with the univariate tests in Bahmani-Oskooee et al. (2008) our CDR-NPU tests support the theory that less industrialized economies exhibit stronger and more distinct nonlinear adjustment patterns towards PPP.     

Asymmetry dynamics in real exchange rates: New results on East Asian currencies

This paper provides new evidence on the purchasing power parity (PPP) hypothesis in six East Asian countries. Based on nonlinear unit root tests, we discovered that the results are broadly consistent with the fact that real exchange rates (RERs) follow a nonlinear mean reversion process. We presented new evidence that the adjustment towards the PPP parity is asymmetric (LSTAR process) above and below the equilibrium value in all but one case — the Malaysian ringgit (MYR). The empirical results suggest that it is important that the conventional tests of PPP be amended to take account of asymmetries in the adjustment process in RERs.     

On PPP,unit roots and panels

In this paper we use a combination of time series unit root and cointegration analysis and the Bai and Ng (Econometrica 72:1127–1187, 2004) factor model approach to assess the purchasing power parity hypothesis for four real exchange rate panels. Our main findings are twofold: First, we find robust evidence for nonstationary common components in the real exchange rate panels and hence no evidence for PPP. Second, the presence of nonstationary common components is consistent with rejections of the unit root null hypothesis when applying a battery of first and second generation panel unit root tests, which are known to be adversely affected in the presence of common nonstationary components.     

Panel asymmetric nonlinear unit root test and PPP in Africa

This study revisits purchasing power parity (PPP) theory for 20 African countries using panel asymmetric nonlinear unit root test proposed by Emirmahmutoglu and Omay (2014), through the sequential panel selection method of Chortareas and Kapetanios (2009). While standard panel unit root tests fail to support the PPP, the empirical results from panel asymmetric nonlinear unit root test do support the PPP. However, additional tests reveal that support in all 20 African countries is mostly due to stationarity of the real effective exchange rates of Ghana and Rwanda where the adjustment process towards equilibrium is nonlinear and asymmetric.     

The real exchange rate and the black market exchange rate in developing countries

This article tests for the validity of the Purchasing power parity (PPP) theory using both the black market and the official exchange rates for panels with cross sectional dependency. The test is conducted using a newly developed, nonlinear IV panel unit root test that properly handles cross-sectional dependency for thirty-seven developing countries. We find that the null of joint unit root hypothesis is rejected for the whole panel, using the black market exchange rate, and for sub-panels of African and high inflation countries, using either exchange rate. The black market-based real exchange rates are, therefore, shown to provide stronger evidence for the purchasing power parity theory than do the official rates. This finding is consistent with the observation that black market exchange rates better represent market forces and thus are more relevant when testing for the validity of the PPP theory in developing countries.     

A panel cointegration approach to the investment-saving correlation

This paper augments the empirical literature concerning the Feldstein-Horioka puzzle using non-stationary panel data. Recently developed tests for panel cointegration and panel unit root tests are employed. We find substantial evidence to support the hypothesis of no cointegration in this panel, implying a high degree of international capital mobility. Our results suggest that tests for cointegration in panel data provides a better methodological focus than the magnitude of saving-retention coefficients. First version received: August 1999/Final version accepted: December 2000     

A REVISIT TO THE STATIONARITY OF OECD INFLATION: EVIDENCE FROM PANEL UNIT‐ROOT TESTS AND THE COVARIATE POINT OPTIMAL TEST*

This paper re‐examines the stationarity of inflation rates in 19 Organisation for Economic Cooperation and Development countries with the use of cross‐sectional information. We employ the panel unit‐root tests that allow for cross‐sectional dependency and the covariate point optimal test. These tests have high power in common due to the exploitation of cross‐sectional information, and they can assist mutually to draw a concrete conclusion on inflation dynamics for all series in the panel. Our empirical results show that allowing for cross‐sectional dependency rejects the null hypothesis that all series in the panel have a unit root, implying that there is at least one stationary series in the panel. With the help of the results of the covariate test, we can distinguish the panel into a group of stationary and a group of non‐stationary series. For robustness, the two groups of series are re‐confirmed by the panel tests. Our results reveal evidence of mean reversion in inflation for 15 of 19 countries, which is significantly stronger as compared to that obtained by the state‐of‐the‐art univariate unit‐root tests.     

Quantile unit root test and the PPP in Africa

In this study, we apply the Quantile unit root test and revisit the Purchasing Power Parity (PPP) in 20 African countries using real effective exchange rates over the period 1971Q1 to 2012Q4. While traditional unit root tests fail to reject unit root hypothesis in most of the countries, results from Quantile unit root test reject unit root null hypothesis in Ghana, Mauritius, Niger, South Africa, and Togo, providing support for the PPP at least in these five countries. We further estimate the half-life based on Quantile autoregressive (QAR) model to be about 4.57–7.96 quarters (1–2 year).     

Testing for PPP: Should we use panel methods?

A common finding in the empirical literature on the validity of purchasing power parity (PPP) is that it holds when tested for in panel data, but not in univariate (i.e. country-specific) analysis. The usual explanation for this mismatch is that panel tests for unit roots are more powerful than their univariate counterparts. In this paper we suggest an alternative explanation. Existing panel methods assume that cross-unit cointegrating relationships, that would tie the units of the panel together, are not present. Using simulations, we show that if this important underlying assumption of panel unit root tests is violated, the empirical size of the tests is substantially higher than the nominal level, and the null hypothesis of a unit root is rejected too often even when it is true. More generally, this finding warns against the automatic use of panel methods for testing for unit roots in macroeconomic time series.First version received: November 2001/Final version received : October 2003     

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.     

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.     

On the Stationarity of Current Account Deficits in the European Union

In this paper, we test for the stationarity of EU current account deficits. Our testing strategy addresses two key concerns with regard to unit‐root panel data testing, namely (i) the identification of which panel members are stationary, and (ii) the presence of cross‐sectional dependence. For this purpose, we employ an AR‐based bootstrap approach to the Hadri (2000 ) test. While there is only mixed evidence that current account stationarity applies when examining individual countries, this does not appear to be the case when considering panels comprising both EU and non‐EU members.     

Evidence on the purchasing power parity in a panel of cities

Evidence is provided on the PPP hypothesis using a sample of 50 Spanish cities for a long time period through the application of panel data unit root tests. Although results suggest non-rejection of the PPP, short-run deviations – as measured by half-lives – indicate that real factors might be causing a slow rate of convergence to a common price index, even in highly integrated economies.     

Quantile nonlinear unit root test with covariates and an application to the PPP hypothesis

In this article, we employ the methods initiated by Hansen (1995) to develop new quantile nonlinear unit root tests with covariates. The limiting distributions of our proposed tests are derived, which are dependent on nuisance parameter reflecting the correlation between the equation error and the covariates. To deal with this inferential difficulty, two alternative procedures based on either consistent estimate of the nuisance parameter or bootstrap implementation of the test are proposed. Monte Carlo simulations show that the proposed tests perform very well in finite samples and large power gains can be achieved by including correlated covariates in the testing equation. The proposed tests are applied to the PPP hypothesis. The empirical results indicate that the real exchange rates are not constant unit root processes.