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

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Author Info
Barumshah, Ahmad Zubaidi
Chan, Tze-Haw
Fountas, Stilianos

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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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File URL: http://mpra.ub.uni-muenchen.de/2025/
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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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Related research
Keywords: Purchasing power parity; Asian financial crisis; bounds test; half-lives; confidence intervals;

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Find related papers by JEL classification:
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing

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  18. Baharumshah, Ahmad Zubaidi & Lau, Evan & Fountas, Stilianos, 2003. "On the sustainability of current account deficits: evidence from four ASEAN countries," Journal of Asian Economics, Elsevier, vol. 14(3), pages 465-487, June. [Downloadable!] (restricted)
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  20. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  21. Murray, Christian J. & Papell, David H., 2002. "The purchasing power parity persistence paradigm," Journal of International Economics, Elsevier, vol. 56(1), pages 1-19, January. [Downloadable!] (restricted)
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  22. Rossi, Barbara, 2005. "Confidence Intervals for Half-Life Deviations From Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 432-442, October. [Downloadable!] (restricted)
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  23. Taufiq Choudhry, 2005. "Asian Currency Crisis and the Generalized PPP: Evidence from the Far East," Asian Economic Journal, East Asian Economic Association, vol. 19(2), pages 137-157, 06. [Downloadable!] (restricted)
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