Abstract

Many studies have tested the null hypothesis of the unit root of the real exchange rate to examine the validity of the purchasing power parity (PPP) hypothesis. Previous studies have reached different conclusions regarding that issue. This study tests the hypothesis of PPP in Kuwait using two tests of unit roots, the Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests. Using monthly data from 2006 to 2015, both tests reject the PPP hypothesis for the Kuwaiti economy. Using the components of the real exchange rate, we find that the levels of prices in both Kuwait and the US are not moving together to provide stationarity for the real exchange rate. This result could be attributed to the large increases in the prices of the housing and food and beverages sectors in Kuwait during that time.

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