Testing the Validity of Purchasing Power Parity for Syria: Evidence from Non-Linear Unit Root Tests

Abstract

This study aims to examine the empirical validity of Purchasing Power Parity (PPP) hypothesis for Syria in the context of unit root tests based on linear and non-linear models. For this purpose, the author uses both the official as well as the parallel real exchange rates of the Syrian Pound against the US dollar from 2011:04 to 2020:08. In addition to conventional unit root tests without and with structural breaks, the nonlinear unit root tests of Kapetanios et al, Kruse, Kılıç and Sollis are applied to test the stationarity of real exchange rates, and hence the validity of PPP. The empirical results reveal that, in contrast to conventional unit root tests, the nonlinear unit root tests provide highly strong evidence in favor of PPP for both real exchange rate series under consideration. These findings signify the importance of accounting for non-linearity to analyze the behavior of real exchange rates in Syria.

Keywords

• purchasing power parity
• real exchange rate
• nonlinearity
• unit root test