Macroeconomic Variables and Validity of PPP Theorem: An Examination of Panel Unit Root Method

The main purpose of this paper is to examine the validity of purchasing power parity between a group of countries based on macroeconomics variables namely, high/low income and the highest GDP per capita over the period 2005Q1-2015Q4. Four types of panel unit root methods, namely Levin, Lin and Chu (LLC), ADF-Fisher, PP-Fisher and Im, Pesaran and Shin (IPS) had been used to test the unit root in real exchange rates. The results of common unit root test LLC found evidence in favor of the validity of PPP. But the results of Im, Pesaran and Shin, ADF-Fisher and PP-Fisher unit root tests results failed to find evidence in the favor of validity of PPP for high/low income and GDP. Hence, this study fails to find evidence for both characteristics. Therefore, the debate of PPP remains elusive and the puzzle will continue.