On the joint Fourier–ESTAR testing of PPP

ABSTRACT

The purchasing power parity (PPP) is the hypothesis that the real exchange rate series are stationary. This study briefly reviews and applies six competing unit root test procedures to test PPP. Reflecting the existing literature, the results are mixed. The Kiliç test is the most favourable while the Kapetanios, Shin, and Snell (KSS) test is the least favourable to PPP and the standard ADF test lies in between. The same conclusion applies to the Fourier extensions of those three tests. The results support a recently suggested F-test for the significance of Fourier terms in unit root test equations.

KEYWORDS:

• Exponential autoregressive models
• flexible Fourier forms
• real exchange rates
• structural breaks
• unit root tests

JEL CLASSIFICATION:

• C12
• C22
• F31

Acknowledgement

The authors thank Professor Su Zhou for her contributions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The study of Enders and Lee (2012b) and its proposed general F-test for the null discussed here were not available at the time of the Christopoulos and León-Ledesma (2010) study; hence, Christopoulos and León-Ledesma relied on the earlier limited F-test of Becker, Enders, and Lee (2006).