Purchasing power parity with nonlinear and asymmetric smooth adjustment

This empirical note applies a simple and powerful nonlinear unit root proposed by Sollis (2009) to test the validity of long-run Purchasing Power Parity (PPP) for Japan's Real Exchange Rate (RER) vis-à-vis its eight trading partner countries. The empirical results indicate that PPP holds for Japan relative to her major trading partners, with the exception of Hong Kong and Thailand, and the adjustment towards PPP is nonlinear and in an asymmetric way. This result provides support for PPP for Japan relative to its major trading partner countries.