Title: Purchasing power parity with nonlinear and asymmetric smooth adjustment for the Middle Eastern countries
Abstract: Abstract This empirical note uses a simple and powerful nonlinear unit root test proposed by Sollis (Citation2009) to test the validity of Purchasing Power Parity (PPP) for Middle Eastern countries. Empirical test results indicate that PPP is valid for most of these Middle Eastern countries, with the exception of Bahrain. These results have important policy implications for the Middle Eastern countries under study. Keywords: nonlinear adjustmentunit root testpurchasing power parityMiddle Eastern countriesJEL Classification: C22F31 Notes 1 Reasons for the nonlinear adjustment are the presence of transaction costs that inhibit international goods arbitrage, and official intervention in the foreign exchange market may be such that nominal exchange rate movements are asymmetric (Taylor and Peel, Citation2000; Taylor, Citation2004; Juvenal and Taylor, Citation2008; Reitz and Taylor, Citation2008). Kilian and Taylor (Citation2003) also suggest that nonlinearity may arise from the heterogeneity of opinion in the foreign exchange market concerning the equilibrium level of the nominal exchange rate: as the nominal rate takes on more extreme values, a great degree of consensus develops concerning the appropriate direction of exchange rate moves, and traders act as accordingly. 2 The RER series of a country at time t is defined as , where is the nominal exchange rate of home country per dollar, and and denote the consumer price indices of home country and the United States, respectively. 3 For detailed discussion see Sollis (Citation2009, p. 121).
Publication Year: 2012
Publication Date: 2012-03-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot