Linear and Nonlinear Cointegration of Purchasing Power Parity: Further Evidence from Developing Countries

Abstract

In this study, we search for evidence of empirical validity of long-run purchasing power parity (PPP) in case of eight developing countries. We consider both a linear and non-linear model of PPP based on cointegration analysis and apply firstly Johansen's linear approach and then conduct Breitung's rank and score tests to search for any non-linear cointegrating relationship. The results obtained from Breitung's rank test suggest that once the sources of non-linearities are taken into account, the results provide stronger evidence on the empirical fulfillment of PPP.