Nonlinear adjustment to purchasing power parity: 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 East Asian countries from January 1986 to October 2009. Empirical results indicate that PPP holds true for all the countries studied, with the exception of Japan and Philippines, and the long-run PPP adjustment process towards its equilibrium is asymmetric. Our results have important policy implications for these East Asian countries under study.