Article ID Journal Published Year Pages File Type
5055514 Economic Modelling 2012 7 Pages PDF
Abstract

Much interest has been paid recently to the nonlinear cointegrating relations existing among economic variables. Various testing procedures are already available to test for the existence of nonlinear cointegration. For example, Breitung (2001) proposes rank tests and his testing procedure has been broadly applied. In this study, we warn against a blind application of the rank cointegration tests, particularly to economic variables that evidence certain behavior. As an illustration, we employ the nominal exchange rates and relative prices of Papua New Guinea against her major trading partners with the objective of testing the validity of purchasing power parity for the country. Our simulation results also confirm our warnings. Additionally, we provide some simple solutions to the problem we encounter herein.

Research highlights►We study possible nonlinear cointegrating relations in the context of PPP. ►We identify a possible problem of the rank tests for nonlinear cointegration. ►We suggest solutions to the rank problem we identify. ►We find little evidence for PPP in Papua New Guinea.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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