THRESHOLD-AUTOREGRESSIVE, MEDIAN-UNBIASED, AND COINTEGRATION TESTS OFPURCHASING POWER PARITY

We use Dickey-Fuller tests, threshold autoregressive unit-root tests, median unbiased estimators, and cointegration tests for I(1) and I(2) variables to examine the validity of Purchasing Power Parity (PPP). Th e within-sample tests generally lead to the rejection of long-run PPP. Long-term out-of-sample forecasts assuming various forms of long-run PPP are not especially better than those assuming that real rates cont ain a unit-root. We show that no one method emerges as the ''best'' in the sense that it provides the smallest out-of-sample forecast errors . (C) 1998 Elsevier Science B.V.