Testing PPP for Asian economies during the recent floating period

Abstract

The validity of purchasing power parity (PPP) is examined between seven Asian countries and the US during the flexible exchange rate period, in the framework of the Johansen cointegration approach with and without restrictions of the PPP parameters. It is found that a long-run comovement exists between the nominal exchange rate and the prices, but the PPP vector does not exist in the cointegration space and the nominal exchange rate and domestic and foreign prices do not move one by one as implied by the theoretical PPP.