Abstract:
In literature existence of purchasing power parity has been tested through different econometric techniques e.g. cointegration and unit root tests. A plethora of studies utilized the unit root testing procedure to explore the existence of purchasing power parity. However, the unit root procedure has been criticized a lot in literature due to their low power under structural breaks. This study is an attempt to test the existence of purchasing power parity in case of Pakistan with its top twenty trading partners by incorporating one and two structural breaks through LM unit root test. Purchasing power parity exists in majority of the cases when breaks are incorporated.
