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

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Author Info

  • 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.

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Bibliographic Info

Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

Volume (Year): 28 (2003)
Issue (Month): 2 (December)
Pages: 129-147

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Handle: RePEc:jed:journl:v:28:y:2003:i:2:p:129-147

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Related research

Keywords: PPP; The ADF Test; The KPSS Test; Confirmatory Analysis; Structural Break;

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References

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  1. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  2. L. Achy, 2003. "Parity reversion persistence in real exchange rates: middle income country case," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 541-553.
  3. Kari Heimonen, 1999. "Stationarity of the European real exchange rates-evidence from panel data," Applied Economics, Taylor & Francis Journals, vol. 31(6), pages 673-677.
  4. MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January.
  5. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
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Cited by:
  1. Kimakova, Alena, 2008. "The political economy of exchange rate regime determination: Theory and evidence," Economic Systems, Elsevier, vol. 32(4), pages 354-371, December.

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