Purchasing power parity in Asian economies: further evidence from rank tests for cointegration

Abstract

The finding of nonlinear cointegration between Asian exchange rates with the corresponding relative prices and aggregate price levels based on Breitung's (2001) nonparametric rank tests reinforces previous validations of purchasing power parity (PPP) by the parametric testing procedures. Hence, the long-run Asian exchange rates are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis.

Acknowledgements

Fundamental Research Grant (A–002–016-ER/U077) of University Malaysia Sabah is gratefully acknowledged. Participants of the Singapore Economic Review Conference (2005) are acknowledged for their valuable comments.

Notes

¹Taylor (2003, 2006) and Taylor and Taylor (2004) provide in-depth overview on the conceptual, theoretical and empirical aspects of PPP.

²Teräsvirta (1994) provided theoretical details for ESTAR model. Also see Taylor (2006) for a concentrated discussion on the usefulness of this model in characterizing exchange rate adjustment.

³The Monte Carlo simulations by Breitung show that for a wide range of nonlinear models the rank tests perform better than their parametric competitors. To date, Basher and Haug (2003) remains the sole study that employs these tests to examine the validity of PPP. Based on the monthly data from the post-Bretton Woods era of G-10 countries, they report that there is no nonlinear cointegration relationship in PPP.