Purchasing power parity in OECD countries: Nonlinear unit root tests revisited

The aim of this paper is to provide additional evidence on the purchasing power parity empirical fulfilment in a pool of OECD countries. We apply the Harvey et al. (2008) linearity test and the Kruse (2011) nonlinear unit root test. The results point to the fact that the purchasing power parity theory holds in a greater number of countries than has been reported in previous studies.

► Nonlinearity is tested rather than assumed to perform the unit root test. ► Exchange rates are modelled as ESTAR processes, as general as possible. ► Therefore, Kruse (2011) test is preferred to Kapetanios et al. (2003). ► PPP holds for at least half of the countries, most of them in a nonlinear fashion. ► Since we look at REER, this is evidence in favour of a multi-country version of PPP.