PPP in emerging markets: evidence from Fourier non-linear quantile unit root analysis

ABSTRACT

We test PPP in 27 emerging markets by using new Fourier non-linear quantile unit root test. Conventional unit root tests support PPP at most in half of the countries. Fourier non-linear quantile unit root test reinforces PPP in 26 out 27 countries, providing a fresh evidence for solving the PPP puzzle in the case of emerging markets.

KEYWORDS:

• PPP
• smooth breaks
• nonlinearity
• quantile unit root
• emerging markets

JEL CLASSIFICATION:

• C22
• F31

Acknowledgement

Authors would like to thank the Editor (D. Peel) and two anonymous referees for their helpful comments that improve the paper. All errors remain our own.

Disclosure statement

We declare no conflict of interest/competing interests.

Code availability

The codes are available upon request from corresponding author.

Availability of data and material

The data and material are available upon request from corresponding author.

Notes

¹ This asymmetric behaviour of RER can be explained by sticky prices, transaction costs, heterogeneity in agent’s belief for the equilibrium level of exchange rates, and official intervention in foreign exchange markets (see, Christopoulos and León-Ledesma 2010; Chang et al. 2011).

² We determined p with AIC by setting maximum lags to 12.

³ The countries are based on the classification of MSCI Emerging Market Economies.

⁴ The data is available at https://www.bruegel.org/publications/datasets/real-effective-exchange-rates-for-178-countries-a-new-database/. We use REER series that are estimated by using 38 trading partners data since it covers the longest period from 1970. Accession Date: 8 December 2020.

⁵ The data is available at https://stats.bis.org/statx/srs/table/i2?m=B. Accession Date: 8 December 2020.

Additional information

Funding

There is no funding information.