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Empirical Investigation of Long Run PPP Hypothesis: The Case of Temporary Structural Break and Asymmetric Adjustment

Author

Listed:
  • Vasif Abioglu

    (Aksaray University, Department of Economics)

  • Mübariz Hasanov

    (Piri Reis University, Deniz Kampüsü, Department of Industrial Engineering)

Abstract

This study investigates the validity of the long-run PPP hypothesis for 60 economies using trade-weighted REER indices for the period 1994:01-2020:04. In addition to conventional tests, we also apply a battery of new unit root tests that allow for structural breaks and nonlinear adjustment. Our results suggest that test procedures that allow for both a structural break in the deterministic components of the series and nonlinearities in the adjustment towards equilibrium lead to a more frequent rejection of the unit root null hypothesis. In particular, after allowing for a temporary structural break in the series along with nonlinear adjustment towards the gradually changing equilibrium, we were able to reject the null hypothesis of unit root for all countries, thus providing some support for the PPP hypothesis.

Suggested Citation

  • Vasif Abioglu & Mübariz Hasanov, 2021. "Empirical Investigation of Long Run PPP Hypothesis: The Case of Temporary Structural Break and Asymmetric Adjustment," International Journal of Economic Sciences, European Research Center, vol. 10(1), pages 1-19, June.
    • Handle: RePEc:aop:jijoes:v:10:y:2021:i:1:p:1-19
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    Citations

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    Cited by:

    1. Ondrej Bednar, 2021. "The Causal Impact of the Rapid Czech Interest Rate Hike on the Czech Exchange Rate Assessed by the Bayesian Structural Time Series Model," International Journal of Economic Sciences, European Research Center, vol. 10(2), pages 1-17, December.

    More about this item

    Keywords

    PPP; REER; temporary structural break; nonlinear adjustment; the Balassa-Samuelson effect.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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