Title: Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries

Authors: Mariam Camarero, Juan Carlos Cuestas, Javier Ordonez

Addresses: Department of Economics, Jaume I University, Campus del Riu Sec, Castellon 12071, Spain. ' Nottingham Business School, Division of Economics, Nottingham Trent University, Burton Street, NG1 4BU, Nottingham, UK. ' Department of Economics, Jaume I University, Campus del Riu Sec, Castellon 12071, Spain

Abstract: The aim of this article is to provide additional evidence on the fulfilment of the Purchasing Power Parity (PPP) hypothesis in the so-called Mediterranean countries. In order to test for the empirical validity of such a hypothesis, we have applied two types of unit root tests. The first group is due to Bierens (1997), who generalised the alternative hypothesis to nonlinear trend stationarity and the second is Leybourne et al.|s (1998) approach that uses a nonlinear specification for the intercept and slope in order to detrend the series. The results suggest that the evidence in favour of the Purchasing Power Parity hypothesis increases when we allow for nonlinear alternatives.

Keywords: purchasing power parity; PPP; real exchange rate; unit roots; structural change; nonlinearity; Mediterranean countries.

DOI: 10.1504/IJBAAF.2008.020241

International Journal of Banking, Accounting and Finance, 2008 Vol.1 No.1, pp.30 - 46

Published online: 09 Sep 2008 *

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