Influence of exchange rate shocks on purchasing power parity test: Using the NARDL approach

Equity in purchasing power remains an important issue for scholars in the international economy. The validity of this theory is important not only for empirical studies but also for policy makers. The PPP theory holds that due to arbitrage in the international commodity market, the real exchange rate is expected to return to its equilibrium level in the long run. Finally, the researchers concluded that one of the major macroeconomic issues that has been linked to many political debates is the exchange rate, which is a non-linear real exchange rate behavior. Given the importance of the subject in this study, we decided to investigate the asymmetric measurement of purchasing power parity test using nonlinear self-regression model with intermittent distribution. In this context, Iran's purchasing power parity with Japan, Norway, Saudi Arabia, Britain and the United States was examined during the period from 1960 to 1986. The results show that in the long run, price shocks have an asymmetric effect on purchasing power parity in Japan, Saudi Arabia, and the United States, while they are symmetric in Norway and the United Kingdom. Moreover, in the short run, price shocks in Japan and Saudi Arabia will have an asymmetric effect on purchasing power parity, while the effect of price shocks in Norway, England and the US on purchasing power parity will be rejected in the short run.