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Purchasing power parity in LDCs: An empirical investigation

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  • Arize, Augustine C.

Abstract

Using the real effective exchange rate (REER) data of sixty-six developing countries and a more extensive monthly dataset from 1980:1 through 2009:10 (i.e., 358 observations), this study examines whether the REER is stationary, using two approaches. The two tests are the KPSS and the KSS test. In contrast to previous studies, we found overwhelming support for the long-run purchasing power parity (PPP) hypothesis; thus, the PPP is a suitable guide for exchange rate determination and exchange rate policy reform in LDCs. We attribute our finding to using REER data as well as linear and nonlinear tests with different null hypotheses.

Suggested Citation

  • Arize, Augustine C., 2011. "Purchasing power parity in LDCs: An empirical investigation," Global Finance Journal, Elsevier, vol. 22(1), pages 56-71.
    • Handle: RePEc:eee:glofin:v:22:y:2011:i:1:p:56-71
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    1. Raihan, Selim & Abdullah, S M & Barkat, Aroni & Siddiqua, Salina, 2017. "Mean Reversion of the Real Exchange Rate and the validity of PPP Hypothesis in the context of Bangladesh: A Holistic Approach," MPRA Paper 77172, University Library of Munich, Germany.
    2. Kai-Hua WANG & Chi-Wei SU & Hsu-Ling CHANG & Ji MA & Cristina IOVU, 2017. "Purchasing Power Parity In China: An Empirical Investigation Based On Bootstrap Rollingwindow Test," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 166-181, December.
    3. Frederick H Wallace & Daniel Ventosa-santaulària & Manuel Gómez-zaldívar, 2014. "Is The Real Effective Exchange Rate Biased Against the PPP Hypothesis?," Economics Bulletin, AccessEcon, vol. 34(1), pages 395-399.

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