The Validity of Purchasing Power Parity Theory in Iran: Evidence from Markov-Switching Unit Root Test

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REZAZADEH ALI; MOHAMMADPOOR SIAVASH; FATTAHI FAHMIDE

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Journal Paper

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Journal: JOURNAL OF APPLIED THEORIES OF ECONOMICS Year:2018 | Volume:5 | Issue:2 Page(s): 55-80

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Title

The Validity of Purchasing Power Parity Theory in Iran: Evidence from Markov-Switching Unit Root Test

Author(s)

REZAZADEH ALI | MOHAMMADPOOR SIAVASH | FATTAHI FAHMIDE | Issue Writer Certificate

Keywords

Exchange rateQ2

Purchasing power parityQ2

MSADF unit root testQ2

IranQ1

Abstract

The main objective of this study is to examine the validity of Purchasing power parity (PPP) theory in Iran economy using annual data during 1960-2017. The conventional method for testing PPP is the traditional unit root tests like ADF. But, because of multiple periods of stability and dramatic shocks in Iranian foreign exchange market which consequently results in nonlinear behavior of the Exchange rate, these linear tests may cause in inaccurate results. Therefore the traditional linear unit root tests, in such circumstances, should not be used. To overcome this problem we have used Markov Switching Augmented Dickey Fuller Nonlinear unit root test. For comparison purposes, we have also performed linear ADF test. Results of linear ADF test indicate that there is no evidence of PPP. However, MSADF test results show that PPP holds in Iran economy in some periods in our sample. The results of nonlinear test are as expected, because, for years, central bank has tried to peg the Exchange rate and just in some periods Exchange rate could move freely.

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APA: Copy

REZAZADEH, ALI, MOHAMMADPOOR, SIAVASH, & FATTAHI, FAHMIDE. (2018). The Validity of Purchasing Power Parity Theory in Iran: Evidence from Markov-Switching Unit Root Test. JOURNAL OF APPLIED THEORIES OF ECONOMICS, 5(2 ), 55-80. SID. https://sid.ir/paper/384524/en

Vancouver: Copy

REZAZADEH ALI, MOHAMMADPOOR SIAVASH, FATTAHI FAHMIDE. The Validity of Purchasing Power Parity Theory in Iran: Evidence from Markov-Switching Unit Root Test. JOURNAL OF APPLIED THEORIES OF ECONOMICS[Internet]. 2018;5(2 ):55-80. Available from: https://sid.ir/paper/384524/en

IEEE: Copy

ALI REZAZADEH, SIAVASH MOHAMMADPOOR, and FAHMIDE FATTAHI, “The Validity of Purchasing Power Parity Theory in Iran: Evidence from Markov-Switching Unit Root Test,” JOURNAL OF APPLIED THEORIES OF ECONOMICS, vol. 5, no. 2 , pp. 55–80, 2018, [Online]. Available: https://sid.ir/paper/384524/en

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