Abstract:
This paper examines the long-run purchasing power parity (PPP) by testing for unit roots
in real exchange rates of 10 newly industrialized countries (NICs) during the period
1980-2013. Alternatively, this paper examines the long-run PPP by evaluating the
cointegration between nominal exchange rates and price ratios of the NICs. The Pesaran
(2007) unit root test results support the evidence of long-run PPP during the period
1980-1990; however, during the other sub-periods, the results invalidate the long-run PPP.
We find that the evidence against the unit root hypothesis is stronger for larger than small
samples, for monthly than quarterly data. Moreover, the results suggest the mere evidence of
strong PPP and also suggest that the speed at which the real exchange rates restore to
equilibrium is relatively slow during the period 1991-2000.
