Several different approaches have been followed by researchers to test the validity of Purchasing Power Parity (PPP). Since the introduction of the unit-root tests, researchers have applied a battery of these tests to determine whether the real exchange rates are stationary. If the answer is in the affirmative, PPP is validated. While application of the standard augmented Dickey-Fuller test has not provided much support for PPP, a test that incorporates nonlinearity in the rates has. Under both tests, however, the null of nonstationary is tested against the alternative of stationarity. In this article, when we switch the null with the alternative and apply Kwiatkowski et al. (1992) test, we provide relatively more support for the theory, getting closer and closer towards solving the PPP puzzle.
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Document Type: Research Article
The Center for Research on International Economics and the Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, WI 53201
Department of Economics, Southern Illinois University, Edwardsville, IL 62026-1102
Department of Economics, University of Texas at San Antonio, TX 78249-0633
Publication date: 01 November 2009
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