On the joint Fourier–ESTAR testing of PPP

Towards resolving the purchasing power parity (PPP) ‘Puzzle’ in newly industrialized countries (NIC’s)

“…These breaks are primarily attributed to financial crisis, exchange rate regime shifts and other external shocks such as oil and food price spikes which are characteristic in long-term data series. Recently, a handful of empirical works have applied more vigorous unit root testing techniques which account for asymmetries and unobserved structural breaks (Christopoulos and Leon-Ledesma (2010), He and Chang (2013), Firoozi and Lien (2016), Mike and Kizilkaya (2019)). These tests can capture any structural break of an unknown form as a smooth process by means of flexible Fourier transforms (Becker et al (2006), Enders and Lee (2012), Rodrigues and Taylor (2012)).…”

“…Yilanci and Eris (2013) apply the DF-Fourier and Fourier-ESTAR unit root tests to examine the PPP hypothesis for 33 African countries and find stationarity in the RER's for 20 of these countries. Firoozi and Lien (2016) apply the joint Fourier-ESTAR unit root testing procedures to examine the integration properties of RER's in 21 industrialized economies. Compared with the conventional ADF and PP unit root test results, the Fourier-ESTAR tests provided more concrete evidence in favour of the PPP hypothesis for these advanced economies.…”

“…Altogether, the application of Flexible Fourier form (FFF) based unit root tests has contributed towards resolving the 'PPP' puzzle associated with the failure of previous empirical studies in supporting the hypothesis in the post-Bretton Woods era. And yet we observe room to increase the scope of these studies as the current works are almost exclusively focused on industrialized regions such as the OECD and the Euro area (see Christopoulos and Leon-Ledesma (2010), He and Chang (2013), Firoozi and Lien (2016), Bahmani-Oskooee et al (2017), Bahmani-Oskooee andWu (2018)). Our study uses joint Fourier-ESTAR unit rooting procedures to re-examines the PPP hypothesis for 14 New Industrialized Countries (NIC's) (Argentina, Brazil, China, Egypt, India, Indonesia, Malaysia, Mexico, the Philippines, Russia, Thailand, Turkey, Vietnam, and South Africa).…”

“…The general ambiguity observed from these previous studies on the PPP hypothesis in NIC's can be primarily attributed to the various unit root testing procedures applied which generally tend to ignore important asymmetries and structural breaks across the different spans and frequencies of data, a shortcoming which our study overcomes. Secondly, we use fractional frequencies of the Fourier-form unit root tests in conducting our empirics and this technique is an incremental extension of the integer based nonlinear FFF unit root tests used in the PPP studies of Christopoulos and Leon-Ledesma (2010), He and Chang (2013), Firoozi and Lien (2016) and Mike and Kizilkaya (2019). Omay (2015) and Omay et al (2017) demonstrate that whilst the Fractional Frequency Fourier form (FFFFF) tests retain similar asymptotic properties to the single frequency Fourier DF-type tests of Enders and Lee (2012), they simultaneously reduce the possibility of type II errors, overfiltration and inappropriate nonlinear trend detection.…”