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Purchasing Power Parity: Further Evidence and Implications

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  • Hassanain K.

    (Department of Economics, UAE University)

Abstract

This study tests the validity of the purchasing power parity (PPP) theory using a panel of ten Arab countries. It also measures the speed of convergence for the panel and for the Gulf Cooperation Council (GCC), including Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates which follow a hard dollar peg. The test is conducted using nine base currencies. The main findings are first on the validity of PPP. (1) The null of unit root is rejected using each of the nine currencies as a numeraire—the result appears to be invariant to the choice of the base currency. (2) The result appears to be stronger when the estimation is based on heterogeneous rather than homogeneous serial correlations among panel units. Secondly, on persistence. (3) The estimated average half-life of a shock to the real exchange rate in the full panel is 2.19 years. (4) The study reveals that for the GCC economies deviation from PPP will be more persistent due to the hard peg, the dollar volatility and the weak goods market arbitrage. Clearly, the GCC countries will need to move to a more stable peg to be able to achieve the benefits they hope by engaging in a monetary union by 2010.

Suggested Citation

  • Hassanain K., 2004. "Purchasing Power Parity: Further Evidence and Implications," Review of Middle East Economics and Finance, De Gruyter, vol. 2(1), pages 61-75, April.
    • Handle: RePEc:bpj:rmeecf:v:2:y:2004:i:1:n:4
    DOI: 10.2202/1475-3693.1020
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    2. Mohammed Ali, Khalifa, 2017. "Competitiveness and Economic Integration in IDB Member Countries," Working Papers 2017-1, The Islamic Research and Teaching Institute (IRTI).
    3. Mohsen Bahmani‐Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less‐Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.
    4. Khalifa Hassanain, 2017. "Stock Prices and Real Exchange Rate Movements in the Gulf Cooperation Council," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 92-96.
    5. Narayan Paresh K & Prasad Biman Chand, 2005. "The Validity of Purchasing Power Parity Hypothesis for Eleven Middle Eastern Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 3(2), pages 44-58, August.

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