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Testing for PPP in developing countries using confirmatory analysis and different base countries: an application to Asian countries

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  • Salah Nusair

Abstract

Previous studies on PPP have tested either the null hypothesis of non-stationary or the null of a stationary real exchange rate and used the US as the base country and focused on industrialized countries. It has been argued that testing either null is insufficient to confirm the presence of PPP. It has also been noticed that the results are sensitive to the choices of the base country; for instance, the US versus Germany. In contrast to previous studies, this paper uses different unit root tests, confirmatory analysis, and different base countries to test PPP for a sample of developing countries in Asia during the current float. Overall, the results do not seem to be sensitive to the choice of the base country, and joint rejections are not present but joint non-rejections are far more common. Using Perron's test, which allows for a one-time break in the series, the results indicate evidence of stationarity for Indonesia, Korea, Malaysia and Thailand when the US is the base country. When Japan is the base country, evidence of stationarity is detected only for Indonesia.

Suggested Citation

  • Salah Nusair, 2001. "Testing for PPP in developing countries using confirmatory analysis and different base countries: an application to Asian countries," International Economic Journal, Taylor & Francis Journals, vol. 18(4), pages 467-489.
  • Handle: RePEc:taf:intecj:v:18:y:2001:i:4:p:467-489
    DOI: 10.1080/1016873042000299945
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    Citations

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    Cited by:

    1. Baharumshah, Ahmad Zubaidi & Chan, Tze-Haw & Aggarwal, Raj, 2006. "The Changing Dynamics of the East Asian Real Exchange Rates after the Financial Crisis: Further Evidence on Mean Reversion," MPRA Paper 6090, University Library of Munich, Germany, revised 22 Nov 2007.
    2. Masafumi Kozuka, 2010. "On the stationarity of Japanese-yen based purchasing power parity in the presence of the structural breaks," Economics Bulletin, AccessEcon, vol. 30(1), pages 1-9.
    3. Taguchi, Hiroyuki, 2010. "The pre- and post-crisis real exchange rate behavior in selected East Asian countries," MPRA Paper 63789, University Library of Munich, Germany.

    More about this item

    Keywords

    PPP; the ADF test; the PP test; the ADF-GLS test; the KPSS test; structural break; JEL Classification: F31; F41; C12;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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