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Purchasing Power Parity Hypothesis in Developing Economies:Some Empirical Evidence from Sri Lanka

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Author Info
Guneratne Banda Wickremasinghe (Monash University)

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Abstract

Purchasing power parity (PPP) hypothesis has attracted a lot of attention from academics and policy-makers particularly, during the recent float. Most previous studies used data from the developed world. This study examines the validity of the PPP hypothesis using data during the recent float from Sri Lanka. In contrast to previous studies, we use unit root tests which take into account unknown means and trends in the real exchange rates as well as graphical techniques. Both these techniques overwhelmingly reject the empirical validity of the PPP hypothesis for Sri Lanka. The results from widely-used unit root tests, however, provide mixed evidence. We attribute these inconclusive results to the low power of the widely-used unit root tests and their inability to account for unknown trends and means in the real exchange rates.

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Paper provided by EconWPA in its series International Finance with number 0406005.

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Date of creation: 18 Jun 2004
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Handle: RePEc:wpa:wuwpif:0406005

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Related research
Keywords: Real exchange rates; Sri Lanka; Purchasing power parity; ERS test; DF-GLS test; US dollar;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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  18. L. Achy, 2003. "Parity reversion persistence in real exchange rates: middle income country case," Applied Economics, Taylor and Francis Journals, vol. 35(5), pages 541-553, March. [Downloadable!] (restricted)
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  20. Azali, M. & Habibullah, M. S. & Baharumshah, A. Z., 2001. "Does PPP hold between Asian and Japanese economies? Evidence using panel unit root and panel cointegration," Japan and the World Economy, Elsevier, vol. 13(1), pages 35-50, January. [Downloadable!] (restricted)
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