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Full Length Research Paper
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Explaining
the long-term real equilibrium exchange rates through
purchasing power parity (PPP): An empirical investigation on
Egypt, Jordan and Turkey
Naser .I. Abumustafa1 and
Mete Feridun2*
1Department
of Finance and Economics, Gulf University for Science and
Technology, Kuwait.
2Department
of Banking and Finance, Faculty of Business and Economics,
Eastern Mediterranean University,
Gazi Magosa, Mersin 10, Turkey.
*Corresponding author. E-mail:
mete.feridun@emu.edu.tr.
Accepted 29 June, 2010 |
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Abstract |
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This study aims at testing the validity of PPP as a long-term
equilibrium condition for bilateral exchange rates in three
emerging economies of the Middle East, namely Egypt, Jordan
and Turkey through the Augmented Dickey-Fuller (ADF),
Phillips-Perron (PP), and the Kwiatkowski, Phillips, Schmidt,
and Shin (KPSS) unit root tests. Results of the ADF and PP unit
root tests indicate that the null hypothesis of non-stationary
real exchange rate can not be rejected in all cases implying
that PPP fails to hold in all three countries. Using the KPSS
test, the null hypothesis of trend stationary real exchange rate
can not be rejected in all cases indicating that the real
exchange rate in the three countries is stationary when a trend
is included. Therefore, PPP in these countries is not sensitive
to the choice of the base country but can be influenced by the
type of test employed.
Key words:
PPP, unit root tests, ADF test, KPSS test, PP test. |
