PURCHASING POWER PARITY IN LATIN AMERICAN COUNTRIES: LINEAR AND NONLINEAR UNIT ROOT TESTS WITH STATIONARY COVARIATES

We apply both linear and nonlinear unit root tests with stationary covariates, proposed Hansen (1995) and Tsong (2011), respectively to test the validity of long-run Purchasing Power Parity (PPP) for a sample of Latin American countries over January 1995 to February 2010. Empirical results from both linear and nonlinear unit root test with different stationary covariates indicate that PPP holds true for all of the Latin American countries. Our results have important policy implications for the Latin America countries under study.