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

Author Info

Listed author(s):
  • 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.

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File URL: https://mpra.ub.uni-muenchen.de/51922/1/MPRA_paper_51922.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51922.

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Date of creation: 07 Aug 2000
Publication status: Published in Asian Economic Journal 1.14(2000): pp. 71-85
Handle: RePEc:pra:mprapa:51922
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Keywords: Purchasing Power Parity; current account balance; government spending; Malaysia;

Find related papers by JEL classification:

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

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  1. Officer, Lawrence H, 1978. "The Relationship between Absolute and Relative Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 562-568, November.
  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.
  3. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  4. Frenkel, Jacob A., 1981. "The collapse of purchasing power parities during the 1970's," European Economic Review, Elsevier, vol. 16(1), pages 145-165.
  5. Asea, Patrick K & Mendoza, Enrique G, 1994. "The Balassa-Samuelson Model: A General-Equilibrium Appraisal," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 244-267, October.
  6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  7. Glen, Jack D., 1992. "Real exchange rates in the short, medium, and long run," Journal of International Economics, Elsevier, vol. 33(1-2), pages 147-166, August.
  8. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
  9. 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.
  10. Corbae, Dean & Ouliaris, Sam, 1988. "Cointegration and Tests of Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 508-511, August.
  11. Chowdhury, Abdur R. & Sdogati, Fabio, 1993. "Purchasing power parity in the major EMS countries: The role of price and exchange rate adjustment," Journal of Macroeconomics, Elsevier, vol. 15(1), pages 25-45.
  12. Strauss, Jack, 1999. "Productivity differentials, the relative price of non-tradables and real exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(3), pages 383-409.
  13. Pippenger, Michael K., 1993. "Cointegration tests of purchasing power parity: the case of Swiss exchange rates," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 46-61, February.
  14. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
  15. Paul R. Krugman, 1990. "Equilibrium Exchange Rates," NBER Chapters,in: International Policy Coordination and Exchange Rate Fluctuations, pages 159-196 National Bureau of Economic Research, Inc.
  16. Kenneth Rogoff, 1992. "Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 10(2), pages 1-29, November.
  17. Kim, Yoonbai, 1990. "Purchasing Power Parity in the Long Run: A Cointegration Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 491-503, November.
  18. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
  19. Sebastian Edwards, 1999. "Crisis Prevention: Lessons from Mexico and East Asia," NBER Working Papers 7233, National Bureau of Economic Research, Inc.
  20. Edison, Hali J, 1987. "Purchasing Power Parity in the Long Run: A Test of the Dollar/Pound Exchange Rate (1890-1978)," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(3), pages 376-387, August.
  21. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  22. Alston Flynn, N. & Boucher, Janice L., 1993. "Tests of long-run Purchasing Power Parity using alternative methodologies," Journal of Macroeconomics, Elsevier, vol. 15(1), pages 109-122.
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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.

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