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Re-examining Purchasing Power Parity for East-Asian Currencies: 1976-2002

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  • Barumshah, Ahmad Zubaidi
  • Chan, Tze-Haw
  • Fountas, Stilianos

Abstract

We investigate the behavior of real exchange rates of six East-Asia countries in relation to their two major trading partners – the US and Japan. These countries, Singapore excepted, were affected by the financial crisis of the fall 1997. Using monthly frequency data from 1976 to 2002 and the ARDL cointegration procedure we test for the long-run PPP hypothesis. We find no evidence for the weak form of PPP in the pre-crisis period but strong evidence in the post-crisis period. For the post-crisis period, we also find very small persistence of PPP deviations as indicated by very small half-lives (less than 7 months) and narrow confidence intervals with an upper bound of 1 year or less in most countries. Our findings reveal that the East Asian countries are returning to some form of PPP-oriented rule as a basis for their exchange rate policies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2025.

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Date of creation: 2004
Date of revision: 2006
Handle: RePEc:pra:mprapa:2025

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Keywords: Purchasing power parity; Asian financial crisis; bounds test; half-lives; confidence intervals;

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Cited by:
  1. Chan, Tze-Haw, 2012. "Assessing the international parity conditions and transmission mechanism for Malaysia-China," MPRA Paper 38930, University Library of Munich, Germany.
  2. Chan, Tze-Haw, 2011. "A structural modeling of exchange rate, prices and interest rates between Malaysia-China in the liberalization era," MPRA Paper 32955, University Library of Munich, Germany.
  3. Chin-Ping King, 2012. "Half Life of the Real Exchange Rate: Evidence from the Nonlinear Approach in Emerging Economies," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 8(1), pages 1-23, January.

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