Purchasing power parity in GIIPS countries: evidence from unit root tests with breaks and non-linearity

Purpose This paper aims to test purchasing power parity (PPP) hypothesis for Greece, Italy, Ireland, Portugal and Spain, which are known as the GIIPS countries. Design/methodology/approach The authors conduct a comprehensive analysis by using unit root approaches without and with structural breaks and non-linearity. Findings The PPP is valid for the GIIPS countries. Considering structural breaks in non-linear framework plays a crucial role. Originality/value There is no empirical study testing PPP hypothesis by focusing on the GIIPS countries. This study further takes into account for structural breaks and non-linearity in the real exchange rates of these countries.

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Foreign exchange markets and the purchasing power parity theory

African Journal of Economic and Management Studies ◽

10.1108/ajems-03-2017-147 ◽

2017 ◽

Vol 8 (1) ◽

pp. 89-102 ◽

Cited By ~ 27

Author(s):

Bernard Njindan Iyke ◽

Nicholas M. Odhiambo

Keyword(s):

Exchange Rate ◽

Purchasing Power Parity ◽

Unit Root ◽

Structural Breaks ◽

Unit Root Tests ◽

Purchasing Power ◽

Power Parity ◽

Content Type ◽

The Exchange Rate ◽

Trade And Investment

Purpose The purpose of this paper is to examine the validity of the purchasing power parity (PPP) hypothesis for two Southern African countries, namely: Lesotho and Zambia. Design/methodology/approach The authors utilized four econometric tests to examine the existence of the PPP hypothesis in Lesotho and Zambia. These tests include two unit root tests without structural breaks – the Dickey-Fuller generalized least squares (DF-GLS) test and the Ng-Perron test; and two unit root tests with structural breaks – the Perron test and the Zivot-Andrews test. The authors’ empirical analysis is based on an annual data set with varying time periods. The sample period spanned 1960-2010 and 1955-2010, for Lesotho and Zambia, respectively. Findings The authors found that the PPP hypothesis was supported in the case of Lesotho, but rejected in the case of Zambia. Originality/value This paper is the first to simultaneously explore the exchange rate policies, trends, and the PPP for these two countries. The implication of this finding is that Lesotho is unlikely to profit immensely from trade and investment arbitrages; whereas Zambia is more likely to profit immensely from trade and investment arbitrage by trading with the USA. Moreover, the authors’ findings indicate that the PPP doctrine may be a useful guide for the exchange rate and other macroeconomic adjustment policies in Lesotho but not in Zambia.

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The purchasing power parity revisited: New evidence for 16 OECD countries from panel unit root tests with structural breaks

Journal of International Financial Markets Institutions and Money ◽

10.1016/j.intfin.2006.08.002 ◽

2008 ◽

Vol 18 (2) ◽

pp. 137-146 ◽

Cited By ~ 14

Author(s):

Paresh Kumar Narayan

Keyword(s):

Purchasing Power Parity ◽

Unit Root ◽

Structural Breaks ◽

Oecd Countries ◽

Unit Root Tests ◽

Purchasing Power ◽

Panel Unit Root Tests ◽

Power Parity ◽

Panel Unit Root ◽

New Evidence

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Stationarity of Real Exchange Rates in the “Fragile Five”: Analysis with Structural Breaks

International Journal of Economics and Finance ◽

10.5539/ijef.v8n4p254 ◽

2016 ◽

Vol 8 (4) ◽

pp. 254 ◽

Cited By ~ 1

Author(s):

A. Oznur Umit

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Purchasing Power Parity ◽

Unit Root ◽

Structural Breaks ◽

Emerging Market ◽

Real Exchange Rates ◽

Unit Root Test ◽

Unit Root Tests ◽

Power Parity

In this study the stationarity of monthly real exchange rate data for the “fragile five” countries which are among the emerging market economies, is analyzed for the period of 2003:01-2015:10, using traditional unit root tests and unit root tests with structural breaks. According to the results of traditional Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root test results, it has been determined that the real exchange rate series of the fragile five countries had a unit root and therefore the Purchasing Power Parity (PPP) hypothesis does not hold true in these countries. The results of a Zivot-Andrews unit root test, which allows for a single structural break, show that real exchange rate series were stationary for Brazil and India, and hence the PPP hypothesis is valid in these countries. According to the results of a Lee-Strazicich unit root test, which allows for two structural breaks, it has been concluded that the hypothesis is valid only for India. Likewise, using the Carrion-i- Sivestre (CS) unit root test, which allows for five structural breaks in the time series, it has been determined that only South Africa’s and India’s real exchange rate series are not stationary, and therefore the PPP hypothesis is not valid for these countries. In line with the results of the CS unit root test it can be claimed that, due to the fact that South African and Indian central banks are not under the pressure of establishing exchange rate stability, they have the possibility of implementing an independent monetary policy.

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