Abstract
Purchasing power parity (PPP) has been one of the most enduring concepts in the global economy. However, its validity has been questioned around for a long time. In this study, annual data on real effective exchange rates for 64 countries or regions from 1994−2022 are used to conduct a unit root test without structural breaks, followed by the same test containing one or two structural breaks. The result shows that a unit root test with structural break leads to an increase in the number of countries with a steady state of the exchange rate, as this method reflects the effect of irresistible factors on smoothness. In general, 43 countries or regions have a steady series of the real effective exchange rate, which means that 67.19% of them follow mean reversion, confirming the validity of the PPP theory. Developed countries (regions) and emerging countries (regions) are steady overall, and the opposite is true for frontier countries (regions).
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