Abstract

The purpose of this study is to empirically investigate the theory of Purchasing Power Parity for Iran during 1339-1391. In order to do this, Zivot-Andrews and Lee Strazicich unit root tests, which take the possibility of structural breaks into consideration, have been used. According to the results, the null hypothesis of Zivot-Andrews and Lee Strazicich unit root tests for the real exchange rate, i.e. there exists unit root, could not be rejected, and thus, it cannot be concluded that real exchange rate is stationary. The non-stationarity of real exchange rate, in turn, means that the hypothesis of the existence of Purchasing Power Parity in Iran is rejected. To ensure that these findings are valid, Saikkonen Lutkepohl and Dynamic OLS co-integration tests were also applied. These tests confirm the results of pervious unit root test as well and show that the Purchasing Power Parity theory is not workable for Iran over the period in question.