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Purchasing Power Parity Based on Capital Account, Exchange Rate Volatility and Cointegration: Evidence from Some Developing Countries

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  • Ahmed, M.

Abstract

One of the most important and recurrent concept in international macroeconomics is Purchasing Power Parity (PPP) hypothesis. PPP has been used as a theory of domestic price determination under fixed exchange rate regime and a theory of exchange rate determination under flexible exchange rate regime. The main purpose of this study is to examine how well the PPP theory fit to the developing countries. The purpose is accomplished through conducting a battery of tests – non-regression based, regression based and co-integration based. An important feature of the study is that test of PPP which relies on capital account is also carried out. In general our findings do not support the PPP theory. PPP is not supported even if we rely on capital account in derivation of PPP. Only the relative version of PPP as a theory of price determination in Pakistan does have some empirical support. The paper also discusses potential reasons for empirical failure of PPP in developing countries.

Suggested Citation

  • Ahmed, M., 2005. "Purchasing Power Parity Based on Capital Account, Exchange Rate Volatility and Cointegration: Evidence from Some Developing Countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(3).
    • Handle: RePEc:eaa:aeinde:v:5:y:2005:i:3_6
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    Cited by:

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    2. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
    3. Sonali DAS , Rangan GUPTA & Patrick A. KAYA, 2010. "Convergence Of Metropolitan House Prices In South Africa: A Re-Examination Using Efficient Unit Root Tests," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 10(1).
    4. Aye, G.C. & Goswami, S. & Gupta, R., 2013. "Metropolitan House Prices In Regions of India: Do They Converge?," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 13(1), pages 135-144.
    5. Robertson, Raymond & Kumar, Anil & Dutkowsky, Donald H., 2014. "Weak-form and strong-form purchasing power parity between the US and Mexico: A panel cointegration investigation," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 241-262.
    6. Islam, Sirajul, 2013. "Testing the Existence of Purchasing Power Parity in Bilateral Trade between Bangladesh and India," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 36(1), pages 121-132, March.
    7. S. M. Woahid Murad, 2016. "Is the Exchange Rate of Bangladesh Mean Reverting? A Panel Unit Root Approach," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(2), pages 100-108, February.

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    More about this item

    Keywords

    Purchasing Power Parity; Uncovered Interest Rate Parity; Real Exchange Rate; Random Walk Process; Unit Root Test;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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