Are Bilateral Real Exchange Rates Stationary? Empirical Evidence from Nigeria

The paper examines the validity of the PPP for Nigeria real exchange rate with its 28 trading partner countries for the period spanning between 1960-2011. Using the Ng and Perron unit root test, the Lagrange multiplier (LM) unit root test with one structural break, and the LM unit root test with two structural breaks, results show that Nigeria's exchange rate vis-a-vis 26 out of 28 countries is stationary and this support the validity of the PPP, Also, using the panel unit root test that accounts for cross-section independence, the t-bar test shows there is evidence of PPP condition, by contrast the CIPS panel unit test that accounts for cross-section dependence fail to reject the null of unit root. Using the ILT(2005), panel unit root test with structural breaks we found robust evidence supporting the PPP condition in Nigeria relative to her 28 trading partners. Thus, the purported support for the PPP hypothesis using the panel unit root without structural breaks could be spurious.