Purchasing Power Parity Hypothesis in OlC Countries: Evidence from Panel Unit Root Tests with Heterogeneous Structural Breaks.

Purchasing power parity hypothesis is viewed as one of the centraldoctrines in international economics. The hypothesis states anequilibrium condition equating the nominal exchange rate between twonational currencies with the relative price of an identical basket oftraded goods in each country . Empirical analysis has produced mixedresults in testing for the PPP. This paper analyzes the empirical validityof PPP hypothesis in OIC countries. Hence, it examines the stationarityof real exchange rate by ADF unit root test and various panel unit roottests. Using univariate ADF unit-root test on single time series and alsothe conventional panel unit root tests namely, 1m, Pesaran, and Shin(2003), Levin, Lin Chu (2002), and Hadri (2000) , it was found thatthe real exchange rate of all OIC countries and also panel series of realexchange rate have unit root. But when recently developed panel LMunit root test that allow for heterogeneous level shifts, are applied , thenull unit roots isn t rejected in real exchange rates series. Our findingsare generally supportive of the PPP hypothesis with the crises leading toshifts in long-run trends