Purchasing Power Parity Based on Capital Account, Exchange Rate Volatility and Cointegration: Evidence from Some Developing Countries
AbstractOne of the most important and recurrent concept in international macroeconomics is Purchasing Power Parity (PPP) hypothesis. PPP has been used as a theory of domestic price determination under fixed exchange rate regime and a theory of exchange rate determination under flexible exchange rate regime. The main purpose of this study is to examine how well the PPP theory fit to the developing countries. The purpose is accomplished through conducting a battery of tests – non-regression based, regression based and co-integration based. An important feature of the study is that test of PPP which relies on capital account is also carried out. In general our findings do not support the PPP theory. PPP is not supported even if we rely on capital account in derivation of PPP. Only the relative version of PPP as a theory of price determination in Pakistan does have some empirical support. The paper also discusses potential reasons for empirical failure of PPP in developing countries.
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Bibliographic InfoArticle provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.
Volume (Year): 5 (2005)
Issue (Month): 3 ()
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Web page: http://www.usc.es/economet/eaa.htm
Find related papers by JEL classification:
- F30 - International Economics - - International Finance - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
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