Nonlinear approaches in testing PPP : evidence from Southern African Development Community

Abstract

In this paper two nonlinearity tests are employed: the nonparametric test developed by Brock, Dechert and Scheinkman - known as the BDS test and the Fourier stationarity test. The BDS non-linearity test detects whether the independent and identically distribute (iid) assumption of the time series used in the analysis holds true or not while the Fourier approximation mimics a wide variety of breaks and other types of nonlinearities. Both tests confirm the non-linear nature of real exchange series in SADC. The result from the Fourier stationary test further provides strong evidence of an OCA among the 11 SADC countries included in this study.