Investigation of Purchasing Power Parity Theory for Fragile Economies: Fourier Stationary and Cointegration Analyses
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https://doi.org/10.5281/zenodo.10050720Keywords:
Purchasing Power Parity, Fragile Economics, Real Exchange Rate, Fourier EstimationsAbstract
This study examines the long run validity of the purchasing power parity theory in weak and strong forms for fragile economics, namely Brazil, India, Indonesia, South Africa and Turkey. The analyses cover quarterly observations from 1980:1 to 2022:4.In this context, the strong form of purchasing power parity is examined with traditional (ADF and PP) and Fourier function (Fourier KPSS) unit root tests. The traditional unit root test results reveal that purchasing power parity theory does not hold almost all countries, whereas the Fourier KPSS unit root test results indicate that the theory in question is valid for all countries. On the other hand, the weak form of purchasing power parity is applied with the Fourier Shin cointegration test developed by Tsong et al. (2016). The findings reveal that the purchasing power parity theory is valid for all countries except India.Fourier function test methods provide more evidence about the validity of purchasing power parity than other methods.
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