REVISITING THE PURCHASING POWER PARITY PRINCIPLE: AN EMPIRICAL ASSESSMENT FOR 163 ECONOMIES

The paper examines the validity of the Purchasing Power Parity (PPP) principle, which dominates the discussion of Real Exchange Rates (RERs) and international trade policies. We employ a range of unit root tests on both time series and panel data to evaluate the stationarity properties of the real effective exchange rates for 163 economies grouped according to their level of development into developed, emerging, and low-income economies. For time series analysis, we use linear unit root tests with and without a structural break, and nonlinear unit root tests. To enhance the analysis, we additionally employ two first-generation panel unit root tests, as well as a second-generation unit root test. The empirical evidence aligns with the wide-ranging body of literature that discards the PPP as an effective analytical framework for explaining the behavior of RERs and for designing trade policy proposals.