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Deviation from Purchasing Power Parity: Evidence from Malaysia, 1973–1997

Author

Listed:
  • Goh, Soo Khoon
  • Mithani, Dawood

Abstract

This paper presents an empirical test of Purchasing Power Parity (PPP) applied to the Malaysia ringgit for the period from 1973 (CPI) and 1984 (WPI) to 1997. Consistent with other research findings, it is detected that real exchange rate follows a random walk. Using multivariate cointegration methodology for the long-run relationship between real exchange rate and certain macro-economic variables, the study provides evidence supporting a long-run relationship between the real exchange rate and the current account balance and government spending, the last two variables have been not included in previous studies of this economy. The causality test between real exchange rate with the current account balance and government spending, however, does not receive support from the error-correction model. This suggests that both government spending and current account balance are not adequate to explain the changes in ringgit real exchange rate.

Suggested Citation

  • Goh, Soo Khoon & Mithani, Dawood, 2000. "Deviation from Purchasing Power Parity: Evidence from Malaysia, 1973–1997," MPRA Paper 51922, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:51922
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    File URL: https://mpra.ub.uni-muenchen.de/51922/1/MPRA_paper_51922.pdf
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    References listed on IDEAS

    as
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    2. Edison, Hali J. & Gagnon, Joseph E. & Melick, William R., 1997. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 1-17, February.
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    Citations

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    Cited by:

    1. 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.
    2. repec:ebl:ecbull:v:6:y:2006:i:14:p:1-20 is not listed on IDEAS
    3. Widodo, Tri, 2007. "Productivity Differentials and Purchasing Power Parity: Cases of Indonesia and Korea," MPRA Paper 78217, University Library of Munich, Germany.
    4. Brian Francis & Sunday Iyare, 2006. "Do exchange rates in caribbean and latin american countries exhibit nonlinearities?," Economics Bulletin, AccessEcon, vol. 6(14), pages 1-20.

    More about this item

    Keywords

    Purchasing Power Parity; current account balance; government spending; Malaysia;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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