Explaining the long-term real equilibrium exchange rates through purchasing power parity (PPP): An empirical investigation on Egypt, Jordan and Turkey

Abstract

This study aims at testing the validity of PPP as a long-term equilibrium condition for bilateral exchange rates in three emerging economies of the Middle East, namely Egypt, Jordan and Turkey through the Augmented Dickey-Fuller (ADF), Phillips-Perron (PP), and the Kwiatkowski, Phillips, Schmidt, and Shin (KPSS) unit root tests. Results of the ADF and PP unit root tests indicate that the null hypothesis of non-stationary real exchange rate can not be rejected in all cases implying that PPP fails to hold in all three countries. Using the KPSS test, the null hypothesis of trend stationary real exchange rate can not be rejected in all cases indicating that the real exchange rate in the three countries is stationary when a trend is included. Therefore, PPP in these countries is not sensitive to the choice of the base country but can be influenced by the type of test employed.