Revisiting Purchasing Power Parity in Emerging-7 Countries: A Powerful Unit Root Test

Abstract

This paper introduces a newly developed unit root test procedure named the Fourier Quantile AESTAR (FAESTAR-QKS) test that allows nonlinearity and structural changes. The FAESTAR-QKS unit root test is mainly based on the quantile approach and provides more powerful results since it is robust toward non-normal errors. Then, we test the Purchasing Power Parity hypothesis (PPP) [or the mean-reverting properties of real exchange rates] in emerging seven (E7) countries (Brazil, China, India, Indonesia, Mexico, Russia, and Turkey) from 1995:1 to 2023:6 by using a novel FAESTAR-QKS test procedure. The results show that the FAESTAR-QKS unit root test provides more evidence on the validity of PPP than the traditional unit root test. Accordingly, the PPP hypothesis is valid in all E7 countries except for Turkey in the long run.