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Does The Balassa–Samuelson Theory Explain The Link Between Relative Population Growth And Purchasing Power Parity?

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  • A. F. M. KAMRUL HASSAN

    (Department of Finance, Murdoch Business School, Murdoch University, 90 South Street Murdoch, Western Australia 6150, Australia)

  • RUHUL SALIM

    (School of Economics & Finance, Curtin Business School (CBS), Curtin University, P. O. Box U1987, Perth, WA 6845, Australia)

Abstract

Relative population growth affects relative prices through the so-called Balassa–Samuelson (BS) mechanism and that in turn impacts PPP. This paper empirically investigates the relationship between the PPP exchange rate and relative population growth in a panel of 80 selected countries. Following the BS hypothesis, this paper argues that relative population growth affects nominal wages that impact price levels and thereby impacts PPP. Using panel cointegration and fully modified ordinary least square (FMOLS), the empirical results show that there is a stable relationship between PPP exchange rate and relative population growth in the long run. These empirical findings suggest that population growth have an important role in exchange rate determination through PPP.

Suggested Citation

  • A. F. M. Kamrul Hassan & Ruhul Salim, 2013. "Does The Balassa–Samuelson Theory Explain The Link Between Relative Population Growth And Purchasing Power Parity?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 58(01), pages 1-19.
    • Handle: RePEc:wsi:serxxx:v:58:y:2013:i:01:n:s0217590813500070
    DOI: 10.1142/S0217590813500070
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    References listed on IDEAS

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    Cited by:

    1. Ming-Jen Chang, 2016. "Half-Life Deviations From Purchasing Power Parity: Evidence From Pacific Rim Countries," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-20, September.

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    More about this item

    Keywords

    Balassa–Samuelson hypothesis; purchasing power parity; population growth; panel cointegration; F31; F29; C23;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F29 - International Economics - - International Factor Movements and International Business - - - Other
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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