Flexible Fourier stationary test in purchasing power parity for African countries

This study applies stationary test with a Fourier function proposed by Enders and Lee (2004 Enders, W and Lee, J. 2004. Testing for a unit root with a nonlinear Fourier function, Tuscaloosa, AL, , USA: Working Paper, Department of Economics, Finance and Legal Studies, University of Alabama.  [Google Scholar], 2009 Enders, W and Lee, J. 2009. The flexible Fourier form and testing for unit roots: an example of the term structure of interest rates, Tuscaloosa, AL, , USA: Working Paper, Department of Economics, Finance and Legal Studies, University of Alabama.  [Google Scholar]) 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.