Evidence on PPP for selected Asian countries from a panel cointegration test with structural breaks

Abstract

The goal of this article is to examine evidence for purchasing power parity (PPP) for a panel of Asian countries, namely Malaysia, Thailand, India, Pakistan, Sri Lanka and the Philippines. Our main contribution is that for the first time in this literature we use a panel cointegration test, developed by Westerlund (2006), which allows us to incorporate multiple structural breaks. We find that using Gregory and Hansen's (1996) residual-based test for cointegration and Pedroni's (1999) panel cointegration test without structural breaks provide weak evidence of cointegration between nominal exchange rates vis-à-vis the US dollar and relative prices. However, when we use the Lagrange multiplier panel structural break cointegration test we find strong evidence of panel cointegration, providing evidence for PPP.

Acknowledgements

I wish to acknowledge helpful comments and suggestions on an earlier version of this article from an anonymous referee of this journal. Any remaining errors or missions are, however, my own doing.

Notes

¹There is a group of recent studies (see, inter alia, Taylor et al., 2001; Chortareas et al., 2002; Kilian and Taylor, 2003; Sarno et al., 2004; Narayan and Narayan, 2007; Narayan, 2007) that examine stationarity of real exchange rates using nonlinear unit root techniques. In addition, Soofi (1998), Alves et al. (2001) and Enders and Chumrusphonelert (2004) undertake a fractional cointegration analysis of PPP. For PPP tests based on panel data, see Helimonen (1999), Carrion-i-Silvestre et al. (2004) and Narayan and Prasad (2007).