Nonlinear adjustment to purchasing power parity in Latin American countries: the ADL test for threshold cointegration

Abstract

This study applies a newly developed Autoregressive Distributed Lag (ADL) test for threshold cointegration proposed by Li and Lee (2010) to test the validity of long-run Purchasing Power Parity (PPP) for a sample of 15 Latin American countries from December 1994 to February 2010. Empirical results indicate that PPP holds true for most of the countries studied, with the exception of Brazil, Chile, Dominica, Haiti and Uruguay, and the long-run PPP adjustment process towards its equilibrium is asymmetric. Our results have important policy implications for these Latin American countries under study.