Testing the Purchasing Power Parity Hypothesis: Case of ASEAN Economies

Open access

Abstract

We examine the purchasing power parity (PPP) hypothesis of 10 members of ASEAN. A battery of panel unit root tests is employed on data series from January 1995 to January 2018 in order to search for validity of PPP in the period before the Great Recession and in the post-crisis period. All the calculations are based on four numeraire currencies: Chinese yuan (CNY), Japanese yen (JPY), US dollar (USD), and the euro (EUR). First, following the outcome of the present study for ASEAN countries, the PPP holds mostly with respect to CNY rates. Second, for the post-financial crisis period, our research proves conclusively that the PPP supposition is predominantly valid between the currencies of ASEAN countries and EUR rates. The sample of countries in the study is limited to the ASEAN group of economies. Based on the evaluated parity conditions, the emergence of global economic crisis brought about significant currency shifts in the ASEAN. The selection and testing of a broader range of numeraire currencies is vital to provide empirical underpinning for PPP notion.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Arize A. C. Malindretos J. & Ghosh D. (2015). Purchasing Power Parity-Symmetry and Proportionality: Evidence from 116 Countries. International Review of Economics and Finance37(C) 69–85. https://doi.org/10.1016/j.iref.2014.11.014

  • Bec F. & Zeng S. (2013). Are Southeast Asian Real Exchange Rates Mean Reverting? Journal of International Financial Markets Institutions & Money 23(February) 265–282. https://doi.org/10.1016/j.intfin.2012.09.010

  • Boršič D. & Bekő J. (2018). Purchasing power parity in ASEAN+3: an application of panel unit root tests. Croatian review of economic business and social statistics4(1) 42-52.

  • Breitung J. (2000). The Local Power of Some Unit Root Tests for Panel Data in Advances in Econometrics Vol. 15: Nonstationary Panels Panel Cointegration and Dynamic Panels Baltagi B.(Ed.) JAI Press Amsterdam 161–178.

  • Chang T. Zhang Y. & Liu W. C. (2010). Purchasing Power Parity for ASEAN-8 Countries: Panel SURKSS Tests. Applied Economics Letters17(15) 1517–1523. https://doi.org/10.1080/13504850903018721

  • Chang T. Lee C. H. & Liu W. C. (2012). Nonlinear Adjustment to Purchasing Power Parity for ASEAN Countries. Japan and the World Economy24(4) 325–331. https://doi.org/10.1016/j.japwor.2012.05.001

  • Choi I. (2001). Unit Root Tests for Panel Data. Journal for International Money and Finance 20 249–272. https://doi.org/10.1016/S0261-5606(00)00048-6

  • Choji N. M. & Sek S. K. (2017). Testing for Purchasing Power Parity for ASEAN-5 Using Asymmetric Cointegration Tests. International Journal of Advanced and Applied Sciences11(4) 155–159. https://doi.org/10.21833/ijaas.2017.011.025

  • Dang V. Q. T. & Yang Y. (2017). Assessing Market Integration in ASEAN with Retail Price Data. Pacific Economic Review22(4) 510–532. https://doi.org/10.1111/1468-0106.12144

  • Feng J. (2018). On the Cusp. Finance & Development55(3) 34–35.

  • Fisher R. A. (1932). Statistical Methods for Research Workers Oliver&Boyd Edinburgh.

  • Froot K. A. & Rogoff K. (1995). Perspectives on PPP and Long-Run Real Exchange Rates In Handbook of International Economics Vol. III Grossman G. Rogoff K. (Ed) Elsevier Science pp. 1647–1688.

  • Hurlin C. (2010). What Would Nelson and Plosser Find Had They Used Panel Unit Root Tests? Applied Economics42(12) 1515–1531. https://doi.org/10.1080/00036840701721539

  • Im K. S. Pesaran M. H. & Shin Y. (2003) Testing for Unit Roots in Heterogenerous Panels. Journal of Econometrics 115(1) 53–74. https://doi.org/10.1016/S0304-4076(03)00092-7

  • IMF. (2018). International Financial Statistics Database. Available at: http://data.imf.org/?sk=4C514D48-B6BA-49ED-8AB9-52B0C1A0179B.

  • Lau C. K. M. Suvankulov F. Su Y. & Chau F. (2012). Some Cautions on the Use of Nonlinear Panel Unit Root Tests: Evidence from a Modified Series-Specific Non-Linear Panel Unit-Root Test. Economic Modelling 29(3) 810–816. https://doi.org/10.1016/j.econmod.2011.08.006

  • Levin A. Lin C. F. & Chu C. (2002). Unit Root Testing in Panel Data: Asymptotic and Finite-Sample Properties. Journal of Econometrics108(1) 1–24. https://doi.org/10.1016/S0304-4076(01)00098-7

  • Maddala G. S. & Wu S. (1999). A Comparative Study of Unit Root Tests with Panel and a New Simple Test. Oxford Bulletin of Economics and Statistics61(0) 631–653.

  • Munir Q. & Kok S. C. (2015). Purchasing Power Parity of ASEAN-5 Countries Revisited: Heterogeneity Structural Breaks and Cross-sectional Dependence. Global Economic Review44(1) 116–149. https://doi.org/10.1080/1226508X.2015.1012091

  • NBER (2012). US Business Cycle Expansions and Contractions. Available at: http://www.nber.org/cycles/US_Business_Cycle_Expansions_and_Contractions_20120423.pdf [05 March 2018].

  • Parikh A. & Wakerly E. (2000). Real Exchange Rates and Unit Root Tests. Weltwirtschaftliches Archiv136(3) 478–490. https://doi.org/10.1007/BF02707290

  • Taylor A. M. & Taylor M. P. (2004). The Purchasing Power Parity Debate. Journal of Economic Perspectives18(4) 135–158. https://doi.org/10.1257/0895330042632744

  • Zhou S. & Kutan A. M. (2011). Is the Evidence for PPP Reliable? A Sustainability Examination of the Stationarity of Real Exchange Rates. Journal of Banking & Finance35(9) 2479–2490. https://doi.org/10.1016/j.jbankfin.2011.02.006

Search
Journal information
Metrics
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 228 228 9
PDF Downloads 261 261 17