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A Test of Purchasing Power Parity: Asia Pacific and Latin America

  • Catherine S. F. Ho

    ()

    (Faculty of Business Management, University Technology MARA, Shah Alam Campus, 40450 Selangor, Malaysia)

  • M. Ariff

    (Department of Finance, Bond University, QLD 4229, Australia)

Finding evidence of the theoretical relationship between exchange rate and inflation has been a difficult proposition in an exchange rate market, despite many studies in developed markets. Three recent papers employing a new research design, Theil’s Divisia index method, found that this relationship holds only in the long run, given the sticky price hypothesis. However, this relationship has not yet been tested for economic regions with close trading networks. The use of this method enables us to resolve a longstanding issue as to the veracity of Purchasing Power Parity (PPP). This paper presents results that suggest long-run equilibria in two close trading regions, within both developed and emerging economies. We believe that these findings on long-run equilibrium and the length of time to equilibrium will enrich the literature on exchange rate market behaviour in both developed and emerging markets.

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Article provided by Penerbit Universiti Sains Malaysia in its journal Asian Academy of Management Journal of Accounting and Finance.

Volume (Year): 5 (2009)
Issue (Month): 2 ()
Pages: 33-53

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Handle: RePEc:usm:journl:aamjaf00502_33-53
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  1. Gunther Schnabl & Dirk Baur, 2005. "Purchasing Power Parity: Granger Causality Tests for the Yen- Dollar Exchange Rate," International Finance 0506006, EconWPA.
  2. Engel, C., 1996. "Long-Run PPP May Not Hold After All," Discussion Papers in Economics at the University of Washington 96-05, Department of Economics at the University of Washington.
  3. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  4. Tamim Bayoumi & Ronald MacDonald, 1999. "Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions," IMF Staff Papers, Palgrave Macmillan, vol. 46(1), pages 5.
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  7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  8. R Macdonald, . "Long Run Purchasing Power Parity: Is It For Real?," Dundee Discussion Papers in Economics 029, Economic Studies, University of Dundee.
  9. Manzur, Meher, 1990. "An international comparison of prices and exchange rates: a new test of purchasing power parity," Journal of International Money and Finance, Elsevier, vol. 9(1), pages 75-91, March.
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  11. JamesR. Lothian & MarkP. Taylor, 2008. "Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod-Balassa-Samuelson Effect?," Economic Journal, Royal Economic Society, vol. 118(532), pages 1742-1763, October.
  12. Officer, Lawrence H., 1986. "The law of one price cannot be rejected: Two tests based on the tradable/nontradable price ratio," Journal of Macroeconomics, Elsevier, vol. 8(2), pages 159-182.
  13. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
  14. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
  15. Henry, Olan T. & Olekalns, Nilss, 2002. "Does the Australian dollar real exchange rate display mean reversion," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 651-666, October.
  16. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June.
  17. Kuo, Biing-Shen & Mikkola, Anne, 2001. "How Sure Are We about Purchasing Power Parity? Panel Evidence with the Null of Stationary Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 767-89, August.
  18. Cheng, Benjamin S., 1999. "Beyond the purchasing power parity: testing for cointegration and causality between exchange rates, prices, and interest rates," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 911-924, December.
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