Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries

Abstract

The aim of this article is to provide additional evidence on the fulfilment of the Purchasing Power Parity (PPP) hypothesis in the so-called Mediterranean countries. In order to test for the empirical validity of such a hypothesis, we have applied two types of unit root tests. The first group is due to Bierens (1997), who generalised the alternative hypothesis to nonlinear trend stationarity and the second is Leybourne et al.'s (1998) approach that uses a nonlinear specification for the intercept and slope in order to detrend the series. The results suggest that the evidence in favour of the Purchasing Power Parity hypothesis increases when we allow for nonlinear alternatives.