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Purchasing Power Parity in Pakistan: Evidence from Fourier Unit Root Tests

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  • Fang She
  • Muhammad Zakaria
  • Mahmood Khan
  • Jun Wen

Abstract

The paper empirically examines the validity of purchasing power parity (PPP) in Pakistan. For this purpose, unit root properties of real exchange rates (RERs) of Pakistan against its 21 major trading partners are examined using Fourier ADF (FADF) and Fourier KPSS (FKPSS) unit root tests for the period 1983Q1 to 2014Q4. Fourier unit root tests are used as they consider multiple temporary structural breaks and nonlinearity of the data. FADF test rejects the null hypothesis of unit root (non-stationary) in three RER series, while FKPSS test rejects the null hypothesis of stationary in nine RER series. Thus, FADF unit root test provide support for PPP hypothesis in three exchange rate series, while FKPSS test validates PPP theory in 12 exchange rate series. For robustness analysis, PPP equation is also estimated using regression analysis. The regression results show that PPP hypothesis is valid for nine exchange rate series. These findings suggest that PPP hypothesis partially holds in Pakistan.

Suggested Citation

  • Fang She & Muhammad Zakaria & Mahmood Khan & Jun Wen, 2021. "Purchasing Power Parity in Pakistan: Evidence from Fourier Unit Root Tests," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(13), pages 3835-3854, October.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:13:p:3835-3854
    DOI: 10.1080/1540496X.2019.1709820
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    Cited by:

    1. Muhammad Zakaria & Seemab Tanveer & Bashir Ahmad Fida & Muhammad Iftikhar ul Husnain, 2023. "Inflation Differential Pass-Through to Exchange Rate: Some Evidence From Pakistan," SAGE Open, , vol. 13(4), pages 21582440231, December.

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