Testing the theory of PPP for emerging market economies that practice flexible exchange rate regimes

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

“…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. In a study closely related with ours, Mike and Kizilkaya (2019) more recently apply quantile-based unit root tests augmented with a single-frequency Fourier function to investigate the PPP hypothesis in 12 emerging market economies and confirm stationarity of the RER for half of these countries (i.e. 6 countries).…”

“…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)).…”

“…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.…”

Purchasing Power Parity in Russia and the Transitioning Economy 1990-1995

“…While, Bahmani-Oskooee & Wu (2018) analyzed 34 OECD countries and reported purchasing power parity supported in 18 countries. Mike & Kizilkaya (2019) studied twelve emerging market economies and found purchasing power parity supported in Columbia, India, Philippines, Poland, South Africa, and Turkey. Mike & Kizilkaya (2019) also found Brazil, Mexico, and Thailand consistent with purchasing power parity, but not necessarily supported.…”

An Analysis of The Validity of Absolute Purchasing Power Parity: The Case of Turkish Lira and British Pound

“…Studies such as Taylor (1988), MacDonald (1993), Enders and Chumrusphonlert (2004), and Doğanlar et al (2009) can be given as examples of empirical studies that try to test the validity of PPP by examining the relationship between nominal exchange rates and price levels. Studies such as Papell (1997), Baum et al (1999), Narayan (2005), Kalyoncu and Kalyoncu (2008), Acaravci and Ozturk (2010), Chang et al (2012), Pan et al (2012), He and Chang (2013), Bahmani-Oskooee et al (2014), Karagöz and Saraç (2016), Bahmani-Oskooee et al (2018), Mike and Kızılkaya (2019), Bahramian and Saliminezhad (2020) and Doğanlar et al (2020) can be given as examples of empirical studies trying to reveal the validity of PPP by testing the stationarity of the real exchange rate. In this study, to test the validity of absolute PPP, it is investigated whether the real exchange rate is stationary or not.…”