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The Validity of Purchasing Power Parity Theory in Iran: Evidence from Markov- Switching Unit Root Test

Author

Listed:
  • Rezazadeh, Ali

    (Assistant Professor of Economics, Urmia University)

  • Mohammadpoor, Siavash

    (PhD student in Economics, Management and Planning Education and Research Institute)

  • Fattahi, Fahmide

    (M.A. in Economics, Urmia University)

Abstract

The main objective of this study is to examine the validity of Purchasing Power Parity (PPP) theory in Iran economy using annual data during 1960-2017. The conventional method for testing PPP is the traditional unit root tests like ADF. But, because of multiple periods of stability and dramatic shocks in Iranian foreign exchange market which consequently results in nonlinear behavior of the exchange rate, these linear tests may cause in inaccurate results. Therefore the traditional linear unit root tests, in such circumstances, should not be used. To overcome this problem we have used Markov Switching Augmented Dickey Fuller Nonlinear unit root test. For comparison purposes, we have also performed linear ADF test. Results of linear ADF test indicate that there is no evidence of PPP. However, MSADF test results show that PPP holds in Iran economy in some periods in our sample. The results of nonlinear test are as expected, because, for years, central bank has tried to peg the exchange rate and just in some periods exchange rate could move freely

Suggested Citation

  • Rezazadeh, Ali & Mohammadpoor, Siavash & Fattahi, Fahmide, 2018. "The Validity of Purchasing Power Parity Theory in Iran: Evidence from Markov- Switching Unit Root Test," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 5(2), pages 55-80, August.
    • Handle: RePEc:ris:qjatoe:0108
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    More about this item

    Keywords

    Exchange rate; Purchasing power parity; MSADF unit root test; Iran;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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