Purchasing Power Parity and Country Characteristics: Evidence from Panel Data Tests

The purpose of this paper is to move beyond the developed countries dichotomy to

investigate the role of country characteristics on purchasing power parity. The distinction

is to investigate whether trade, inflation and geographical (distance) contribute towards the

validity of purchasing power parity. This requires a sample that includes developing

countries because the former contain too little variation to address the question. The

stationary attributes of real exchange rates are examined by using four types of panel unit

root tests for a group of countries for the period 2004Q1-2014Q4. We conclude that

purchasing power parity depends on the country’s characteristics with this perspective, it

is appropriate to investigate purchasing power parity among countries with similar

characteristics.

JEL Codes: F31, O57

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