Purchasing power parity tests in cointegrated panels: evidence from newly industrialized countries

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.