Quantile unit root test and PPP: evidence from 23 OECD countries

Mohsen Bahmani‐Óskooee · Omid Ranjbar

27 citations0/0 files storedApplied Economics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

Application of six different univariate unit root tests to real effective exchange rates of 23 OECD countries supports their stationarity or Purchasing Power Parity theory (PPP) only in five countries, a result consistent with previous research that is known as PPP puzzle. However, descriptive statistics of each effective rate reveals a clear sign of non-normal distribution. To account for this, we use quantile unit root test which allows impact of different shocks to be realized at different quantiles. When we applied this new test to the same rates, number of countries in which PPP is supported increased to 16. Apparently, incorporating effects of shocks improves testing efficiency and provides more support for the PPP and reduces the severity of the puzzle.

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References

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2017Non-linear quantile unit root test and PPP: more evidence from Africa 2017PPP in the 34 OECD countries: evidence from quantile-based unit root tests with both smooth and sharp breaks

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