Further evidence on the PPP analysis of the Australian dollar: Non-linearities, fractional integration and structural changes

The aim of this paper is to analyse the empirical fulfilment of the Purchasing Power Parity (PPP) theory for the Australian dollar. In order to do so we have applied recently developed unit root tests that account for asymmetric adjustment towards the equilibrium [Kapetanios, G., Shin, Y., Snell, A., 2003. “Testing for a unit root in the nonlinear STAR framework”, Journal of Econometrics, 112, 359-379] and fractional integration in the context of structural changes [Robinson, P.M., 1994. “Efficient tests of nonstationary hypotheses”, Journal of the American Statistical Association, 89, 1420-1437; Gil-Alana, L.A., 2008. “Fractional integration and structural breaks at unknown periods of time”, Journal of Time Series Analysis, 29, 163-185]. Although our results point to the rejection of the PPP hypothesis, we find that the degree of persistence of shocks to the Australian dollar decreases after the 1985 currency crisis.