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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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    File URL: http://www.usc.es/economet/reviews/aeid536.pdf
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    References listed on IDEAS

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    1. Patel, Jayendu, 1990. "Purchasing Power Parity as a Long-Run Relation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 367-379, Oct.-Dec..
    2. Genberg, Hans, 1978. "Purchasing power parity under fixed and flexible exchange rates," Journal of International Economics, Elsevier, pages 247-276.
    3. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
    4. Myhrman, Johan, 1976. " Experiences of Flexible Exchange Rates in Earlier Periods: Theories, Evidence and a New View," Scandinavian Journal of Economics, Wiley Blackwell, pages 169-196.
    5. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-1487, December.
    6. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, pages 436-452.
    7. Paul Hallwood & Ronald MacDonald, 2008. "International Money and Finance," Working papers 2008-02, University of Connecticut, Department of Economics.
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    Citations

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    Cited by:

    1. 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.
    2. Goodness C. Aye & Samrat Goswami & Rangan Gupta, 2012. "Metropolitan House Prices In India: Do They Converge?," Working Papers 201220, University of Pretoria, Department of Economics.
    3. 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, pages 241-262.

    More about this item

    Keywords

    Purchasing Power Parity; Uncovered Interest Rate Parity; Real Exchange Rate; Random Walk Process; Unit Root Test;

    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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