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Purchasing Power Parity for Emerging Markets: Evidence From Panel Cointegration Tests

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  • Onder BUBERKOKU

Abstract

This study examines the purchasing power parity (PPP) of 21 emerging markets using different panel co-integration tests. First, Pedroni (1999, 2004), Kao (1999) and Johansen Fisher (1999) tests are applied and Pedroni (2000) panel FMOLS is used to estimate the long-run parameters. The results provide strong evidence for the weak version of PPP. Then, Westerlund (2007) panel co-integration test considering cross section dependency (CD) is employed. In contrast, at this time, results clearly indicate that PPP is not hold. Additionally, when 21 emerging markets are subdivided into emerging Asia, emerging Europe, emerging Latin America and Africa, similar results are found. Therefore, results point out the importance of considering the CD in panel co-integration tests. Based on this analysis, it is concluded that policymakers in these emerging markets should not use purchasing power parity to determine the equilibrium exchange rate.

Suggested Citation

  • Onder BUBERKOKU, 2014. "Purchasing Power Parity for Emerging Markets: Evidence From Panel Cointegration Tests," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 8(1), pages 117-139.
    • Handle: RePEc:bdd:journl:v:8:y:2014:i:1:p:117-139
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    Keywords

    Purchasing Power Parity; Panel Cointegratin; Emerging Markets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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