PURCHASING POWER PARITY IN MENA REVISITED: EMPIRICAL EVIDENCE IN THE PRESENCE OF ENDOGENOUSLY DETERMINED BREAK POINTS

Abstract

This paper re-examines the Purchasing Power Parity hypothesis in which the endogenously determined break points are incorporated in 13 major MENA countries by using official and black market exchange rates data over 1970-1998. We utilize Lagrange Multiplier unit root test that endogenously determines structural breaks in level. We find evidence of PPP for eight of the thirteen countries at the 10% level or better. We also construct the half lives to investigate the persistence of deviations from PPP. The point estimates of the half lives for both OREX and BMREX in the seven countries are lower than range of the consensus of 3-5 years in the literature.(1)