Revisiting purchasing power parity for East Asian countries: panel SURADF tests

Abstract

In this study, the panel Seemingly Unrelated Regression Augmented Dickey–Fuller (SURADF) tests advanced by Breuer et al. (2001) are used to test the validity of Purchasing Power Parity (PPP) for a sample of East Asian countries over the 1985M3 to 2008M5. The empirical results from several panel-based unit root tests indicate that PPP does not hold for East Asian countries under study; however, Breuer et al.’s (2001) panel SURADF tests indicate that PPP is valid for most of the East Asian countries under study.

Acknowledgements

The authors are grateful to Professor Myles S. Wallace who kindly provided the RATS program codes. Any errors that remain are our own.

Notes

¹A number of studies have also provided solid empirical evidence for the nonlinear and/or asymmetric adjustment of the exchange rate. Reasons for the asymmetric adjustment are the presence of transactions costs that inhibit international goods arbitrage and official intervention in the foreign exchange market may be such that nominal exchange rate movements are asymmetric (see Taylor and Peel, 2000; Taylor, 2004; Juvenal and Taylor, 2008). Kilian and Taylor (2003) also suggest that nonlinearity may arise from the heterogeneity of opinion in the foreign exchange market concerning the equilibrium level of the nominal exchange rate: as the nominal rate takes on more extreme values, a great degree of consensus develops concerning the appropriate direction of exchange rate moves, and traders act as accordingly.

²This study can also be extended to allow for the effect of shifts in the equilibrium real exchange rate over time. Future research will be in this direction.