Purchasing Power Parity (PPP) of Australian Dollar: Do Test Procedures Matter?

Abstract

This article aims to reexamine whether Australia’s real exchange rate is mean reverting in the long run by using quarterly trade weighted indices of real exchange rate data for the period of June 1970 to September 2009. We use the state of the art of several more recent econometric tests for this purpose. The empirical result shows that the non-stationarity of Australia’s real exchange rate cannot be rejected. Thus, our results support the PPP hypothesis in Australia. Our results are contradictory to those of Cuestas and Regis (2008), but conform to those of Darné and Hoarau (2007 and 2008).