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Revisiting purchasing power parity for major OPEC countries: evidence based on nonlinear panel unit-root tests

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  • Hsu-Ling Chang
  • Chi-Wei Su

Abstract

In this study, we apply nonlinear panel unit-root test to assess the nonstationary properties of the real exchange rate for seven major Organization of the Petroleum Exporting Countries (OPEC). We find that nonlinear panel unit-root test has higher power than linear method suggested by Breuer et al. (2001) if the true data generating process of exchange rate is in fact a stationary nonlinear process. We re-examine the validity of Purchasing Power Parity (PPP) from the panel nonlinear point of view and provide robust evidence clearly indicating that PPP holds true for four countries, namely Angola, Indonesia, Iran and Saudi Arabia. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.

Suggested Citation

  • Hsu-Ling Chang & Chi-Wei Su, 2010. "Revisiting purchasing power parity for major OPEC countries: evidence based on nonlinear panel unit-root tests," Applied Economics Letters, Taylor & Francis Journals, vol. 17(11), pages 1119-1123.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:11:p:1119-1123
    DOI: 10.1080/00036840902817565
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    Cited by:

    1. Aviral Tiwari & Niyati Bhanja & Arif Dar & Olaolu Olayeni, 2015. "Analyzing Time–Frequency Based Co-movement in Inflation: Evidence from G-7 Countries," Computational Economics, Springer;Society for Computational Economics, vol. 45(1), pages 91-109, January.
    2. Habimana, Olivier, 2016. "Asymmetric nonlinear mean reversion in real effective exchange rates: A Fisher-type panel unit root test applied to Sub-Saharan Africa," The Journal of Economic Asymmetries, Elsevier, vol. 14(PB), pages 189-198.
    3. E. N. Gyamfi & E. F. Appiah, 2019. "Further evidence on the validity of purchasing power parity in selected African countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(2), pages 330-343, April.

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