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A new approach to testing ex ante purchasing power parity

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  • Razzaque Bhatti
  • Imad Moosa

Abstract

Conventional PPP neglects the role of uncertainty and expectations in the determination of exchange rates. In the presence of uncertainty and expectations about the future, as postulated by ex ante PPP, the exchange rate is determined not only by current relative prices but also by the expected real exchange rate, implying that the omission of the latter makes the PPP model misspecified. Results of empirical testing indicate the importance of the role played by the expected real exchange rate in determining the current nominal exchange rate. These results support the ex ante PPP model against the conventional model.

Suggested Citation

  • Razzaque Bhatti & Imad Moosa, 1994. "A new approach to testing ex ante purchasing power parity," Applied Economics Letters, Taylor & Francis Journals, vol. 1(9), pages 148-151.
  • Handle: RePEc:taf:apeclt:v:1:y:1994:i:9:p:148-151
    DOI: 10.1080/135048594358005
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    References listed on IDEAS

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    1. Darby, Michael R., 1981. "Does purchasing power parity work?," Proceedings, Federal Reserve Bank of San Francisco, issue 5, pages 136-173.
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    1. repec:eee:intfin:v:49:y:2017:i:c:p:15-31 is not listed on IDEAS
    2. Imad Moosa & Razzaque Bhatti, 1997. "Are Asian Markets Integrated? Evidence for Six Countries Vis-A-Vis Japan," International Economic Journal, Taylor & Francis Journals, vol. 11(1), pages 51-67.
    3. Min, Hong-Ghi & McDonald, Judith A. & Choung, Jaeyong, 2003. "Dynamic capital mobility, capital-market risk, and contagion: evidence from seven Asian countries," Japan and the World Economy, Elsevier, vol. 15(2), pages 161-183, April.
    4. Razzaque H. Bhatti, 1997. "Do Expectations Play Any Role in Determining Pak Rupee Exchange Rates?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 36(3), pages 263-273.
    5. Razzaque H. Bhatti, 1996. "A Correct Test of Purchasing Power Parity: The Case of Pak-Rupee Exchange Rates," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 671-682.
    6. Hafsa Hina & Abdul Qayyum, 2015. "Re-estimation of Keynesian Model by Considering Critical Events and Multiple Cointegrating Vectors," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 54(2), pages 123-145.
    7. Hong G. Min & McDonald, Judith A., 1999. "Does a thin foreign exchange market lead to destabilizing capital-market speculation in the Asian Crisis countries?," Policy Research Working Paper Series 2056, The World Bank.
    8. Hina, Hafsa & Qayyum, Abdul, 2013. "Estimation of Keynesian Exchange Rate Model of Pakistan by Considering Critical Events and Multiple Cointegrating Vectors," MPRA Paper 52611, University Library of Munich, Germany.

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