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The Validity of Long-run Purchasing Power Parity in the South Asian Countries

Author

Listed:
  • Yunus, Mohammad

    (Senior Research Fellow, Bangladesh Institute of Development Studies (BIDS))

Abstract

The paper examines the validity of long-run Purchasing Power Parity (PPP) and the so-called Generalized Purchasing Power Parity (G-PPP) in five South Asian countries, using the relatively new Johansen cointegration approach. It has been demonstrated that weak-form PPP finds considerable support from data, while the strong-form version of the hypothesis does not, irrespective of whether the official or the parallel market exchange rates are used in the analysis. Moreover, G-PPP seems to hold among these countries. The major policy implication of the findings of the paper is that if the monetary authorities in the South Asian countries wish to stabilize domestic prices or reduce persistent balance of payments deficits they must try to lower the external value of their currencies. These countries can also reap the benefits of co-operation in the core areas of trade, manufactures and services through elimination of various restrictions on regional trade.

Suggested Citation

  • Yunus, Mohammad, 2000. "The Validity of Long-run Purchasing Power Parity in the South Asian Countries," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 26(1), pages 99-124, March.
    • Handle: RePEc:ris:badest:0391
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    Citations

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    Cited by:

    1. Rahman, Pk. Md. Motiur & Yamagata, Tatsufumi, 2004. "Business Cycles and Seasonal Cycles in Bangladesh," IDE Discussion Papers 1, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    2. Ibrahim Chowdhury, 2004. "Purchasing Power Parity and the Real Exchange Rate in Bangladesh: A Nonlinear Analysis," Working Paper Series in Economics 14, University of Cologne, Department of Economics.
    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.

    More about this item

    Keywords

    Purchasing power parity; Real exchange rates; Currency; Gray markets; Development studies; Random walk; Foreign exchange rates; Statistical variance; Empirical evidence;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

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