Purchasing power parity revisited: a comprehensive panel study with structural breaks and common factors across 63 economies
Year: 2025
Type: article
Abstract: We reassess the long-run validity of Purchasing Power Parity (PPP) using the PANIC–Fourier panel unit-root test that allows for smooth structural breaks and common factors, complemented by sharp breaks and common-factor panel tests, on monthly real effective exchange rate (REER) data for 63 countries (1994–2025). Across specifications, the joint panel tests fail to reject the unit root null hypothesis, indicating nonstationary real exchange rates at the panel level. In individual PANIC–Fourier tests, stationarity emerges only for a small subset of countries, corroborated by sharp-break common-factor panel tests. These results caution against relying on PPP as a stand-alone valuation anchor in policy settings and suggest that PPP-based assessments should be supplemented with tools that incorporate global shocks, structural asymmetries, and nonlinear adjustment. Our findings help reconcile mixed evidence in the literature by showing that once cross-sectional dependence and gradual breaks are modeled jointly, panel-wide support for PPP largely dissipates. The study’s originality lies in integrating Fourier-based smooth-break modeling with common-factor PANIC decomposition over a large, globally representative panel, providing new evidence on the persistence of real exchange rate misalignments and their policy implications for inflation-targeting and exchange rate assessment frameworks.
Source: Cogent Economics & Finance
Institution: Angelo State University
Language: English
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,165
OpenAlex ID: W4417073145