Purchasing power parity nonlinear threshold unit root test for East-Asian countries

The Purchasing Power Parity suggests that differences in relative prices in two countries move together with nominal exchange rates in the long run. This study examines the validity of PPP as transition economies for Commonwealth of Independent States (CIS). Purchasing Power Parity holds only when the real exchange rate is stationary in the equation. To test the stationary, we used both time series and panel data analysis. Testing unit root both with time series and panel data in this study, provides us double check of the results. We also test the cross sectional dependence to choose the appropriate panel unit root test. Our test statistics indicate that there is cross section dependence between countries. Hence, one needs to take into consideration the cross section dependence while undertaking unit root tests. Otherwise, the results would be biased. ADF and KPPS indicate that PPP cannot be accepted for the countries except for Russia. According to the panel unit root test results indicate that PPP does not hold for Armenia, Belarus, Georgia, Kazakhstan and Kyrgyzstan except for Russia.

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Investigating the ppp theory and long-run estimates for five Asian countries

International Journal of Engineering & Technology ◽

10.14419/ijet.v7i4.28.22384 ◽

2018 ◽

Vol 7 (4.28) ◽

pp. 26

Author(s):

Niri Martha Choji ◽

Siok Kun Sek

Keyword(s):

Least Squares ◽

Purchasing Power Parity ◽

Unit Root ◽

Ordinary Least Squares ◽

Nominal Exchange Rate ◽

Purchasing Power ◽

Asian Countries ◽

Power Parity ◽

Panel Unit Root ◽

Long Run

The theory of purchasing power parity (PPP) theory posits that the conversion rate between two currencies ought to be the same as the ratio of the total price levels between two currencies. Using monthly recent panel data for five Asian countries, from the period 1996M01-2016M08, the paper examined the PPP theory by utilizing robust methods of panel unit root and cointegration (Pesaran and Westerlund) tests that put into consideration cross-sectional dependence. The panel unit root test results show that all the variables considered are not stationary at levels but stationary at first difference (all variables are I(1)), because of that, the cointegration test was carried out. Results showed the presence of long-run relationship among the variables implying that the purchasing power parity theory exists in the long-run. Furthermore, the long-run relationships were estimated using the dynamic ordinary least squares (DOLS), fully modified ordinary least squares (FMOLS) and the mean group (MG) estimators. Surprisingly, all these estimators gave similar results, they showed that the domestic prices cause depreciation while the foreign prices cause appreciation of the nominal exchange rates in the five Asian countries. Generally, the effect of nominal exchange rate appreciation is more than depreciation in the five Asian countries.

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