Testing the Validity of The Purchasing Power Parity Theory in Selected Integration Organizations by Using the Fourier Function with Fractional Unit Roots

Abstract

The specific terminology of purchasing power parity has been at the centre of international policy debates among the major industrialized countries in the years after World War I. In this study, fractional unit root analysis has been conducted by using Fourier functions. The purchasing power parity theory has been assessed among different integration organizations such as NAFTA, MERCOSUR, EU15, and selected OECD countries for the 1960-2019 period. Fractional Frequency Fourier ADF and conventional ADF tests were performed in the study. Traditional ADF results have been calculated for countries where trigonometric terms are meaningless. According to the analysis results, it has been determined that the purchasing power parity theory is valid for integration organizations except for MERCOSUR.