Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries‪?‬

1. Introduction The debate on the validity of the purchasing power parity (PPP) hypothesis continues. To test PPP, many researchers rely on evidence from unit root tests regarding the (non) stationarity of real exchange rates (RER). Initial studies, which were based on the augmented Dickey-Fuller (ADF) tests, showed evidence against the theory. The failure of validating PPP has been attributed to the low power of these tests. As a result, the literature has moved on in two new directions: While some researchers have turned to panel unit root tests, others have proposed alternative tests that emphasize a nonlinear stationary process. (1)