Some cautions on the use of nonlinear panel unit root tests: Evidence from a modified series-specific non-linear panel unit-root test

The purpose of this paper is to examine the relevance of applying nonlinear panel unit root test to examine the non-linear mean reversion behaviors of real exchange rates. We find that nonlinear panel unit root test may achieve lower power performance as compared to its alternative of linear panel unit test when the data generating process does not contain significant non-linear components. This finding post cautions to researchers in modeling and testing real exchanges behavior. We also develop a modified series-specific nonlinear panel unit root test and find evidence in favor of purchasing power parity hypothesis for China's four ASEAN trading partners in the period of February 1997 to August 2009. ► We examine the relevance of nonlinear panel unit root test in RER behaviors. ► Nonlinear test achieves lower power performance when the data is linear in nature. ► This posts some cautions on the general use of nonlinear panel unit root test. ► We develop and test a modified series-specific test for Chinese RERs. ► Evidence in favor of PPP hypothesis for China's four ASEAN trading partners.