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Testing The Validity Of Purchasing Power Parity For Asian Countries During The Current Float

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  • Salah A. Nusair

    (Department of Finance and Banking, Al-zaytoonah University of Jordan)

Abstract

Previous studies on purchasing power parity (PPP), using unit root tests, have tested either the null hypothesis of a unit root or the null of stationary real exchange rate. It has been argued that using either approach is insufficient to confirm the existence or non-existence of PPP. To strengthen inferences made about a series, the two approaches should be applied within the same study. In contrast to previous studies undertaken to test PPP in developing countries, this paper tests PPP for a sample of developing countries in the Asian financial crisis countries during the current float. The paper applies the ADF and PP tests to test the null of a unit root and the newly developed KPSS test to test the null of stationarity. The null of a unit root can be rejected for Indonesia, Korea and Thailand. We cannot reject the null of stationarity for all countries except for Singapore. Joint testing of both nulls confirms stationarity for Indonesia and Korea. The impact of the Asian financial crisis on the behavior of the real exchange rates in the crisis countries is examined using Perron¡¯s unit root test that accounts for potential structural breaks. The results indicate evidence of stationarity for Indonesia, Korea, Malaysia, and Thailand.

Suggested Citation

  • Salah A. Nusair, 2003. "Testing The Validity Of Purchasing Power Parity For Asian Countries During The Current Float," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 28(2), pages 129-147, December.
    • Handle: RePEc:jed:journl:v:28:y:2003:i:2:p:129-147
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    References listed on IDEAS

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    Cited by:

    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. Kimakova, Alena, 2008. "The political economy of exchange rate regime determination: Theory and evidence," Economic Systems, Elsevier, vol. 32(4), pages 354-371, December.
    3. Mark J. Holmes, 2010. "Are Asia‐Pacific Real Exchange Rates Stationary? A Regime‐Switching Perspective," Pacific Economic Review, Wiley Blackwell, vol. 15(2), pages 189-203, May.

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    More about this item

    Keywords

    PPP; The ADF Test; The KPSS Test; Confirmatory Analysis; Structural Break;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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