Abstract
This paper examined the theory of purchasing power parity (PPP) for a group of developed and developing countries from January 2003 to May 2016 using both linear and nonlinear panel autoregressive distributed lag (ARDL) models. In addition, the paper extended a time series nonlinear ARDL model to a panel nonlinear ARDL model in testing for the PPP. Further, several panel tests of unit root were carried out to inspect the stationary properties of the variables. Outcome of the tests showed that the variables are a combination of I(1) and I(0). Since we have a combination of I(1) and I(0), linear and nonlinear panel ARDL models were estimated. The linear ARDL models were not valid since they failed to provide evidence for cointegration. However, the extended nonlinear panel ARDL models provided evidence of cointegration indicating that the PPP theory is valid for this group of countries. Unlike previous studies on the PPP, this study made a significant contribution by the provision of useful policy implication on the results found.
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