Assessing Purchasing Power Parity (PPP) validity in Algeria, Morocco, and Tunisia using a non-linear approach

This paper examines the validity of purchasing power parity (PPP) in the Maghreb countries, specifically Algeria, Morocco, and Tunisia. It begins with a comprehensive review of the literature on PPP, discussing its empirical validity and the various econometric techniques used to analyze it. The study then employs the threshold autoregressive (TAR) model, as proposed by Caner and Hansen (2001), to investigate the joint hypothesis of nonlinearity and non-stationarity in exchange rate behavior. The results reveal that the real exchange rate (RER) exhibits nonlinear behavior. Furthermore, the bilateral exchange rate between Morocco and Tunisia (DH/DT) is found to be highly persistent and follows a random walk, while the exchange rates between Algeria and Morocco, and Algeria and Tunisia, are characterized by partial unit roots. This suggests that PPP holds in one threshold regime but not in the other.