A century of PPP: supportive results from nonlinear unit root tests

In this paper, we test Purchasing Power Parity (PPP) by applying a new unit root test that allows for nonlinearity in the data to the real exchange rates, constructed with a century of data of 20 countries from Taylor (2002). The problem of lag selection has been taken into account in testing as recommended by Lopez et al. (2005), who challenged Taylor's conclusion that PPP holds well over the 20th century. The results support PPP in 16 out of 19 cases when the US dollar is used as base currency, a result much closer to Taylor (2002) than Lopez et al. (2005) and in line with Wallace and Shelley (2006).