New Evidence on Real Exchange Rate Stationarity and Purchasing Power Parity in Less Developed Countries
Posted: 15 Oct 2001
This study tests for relative purchasing power parity among a sample of thirty less developed countries. For this purpose, a new test advocated by Im, Pesaran and Shin is employed which allows one to test for unit roots in heterogeneous panel datasets. The stationarity of at least one real exchange rate is identified where the average ADF statistic based on demeaned real exchange rate data is significantly different from zero. Using quarterly data covering the period 1973-99, this study finds evidence against purchasing power parity for most less developed countries. This conclusion is also drawn from panels based on region and inflationary experience as well as the application of a panel approach based on seemingly unrelated regression analysis.
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