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 (Citation2006), 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., Citation2001; Chortareas et al., Citation2002; Kilian and Taylor, Citation2003; Sarno et al., Citation2004; Narayan and Narayan, Citation2007; Narayan, Citation2007) that examine stationarity of real exchange rates using nonlinear unit root techniques. In addition, Soofi (Citation1998), Alves et al. (Citation2001) and Enders and Chumrusphonelert (Citation2004) undertake a fractional cointegration analysis of PPP. For PPP tests based on panel data, see Helimonen (Citation1999), Carrion-i-Silvestre et al. (Citation2004) and Narayan and Prasad (Citation2007).
Taylor
,
MP
,
Peel
,
DA
and
Sarno
,
L
.
2001
.
Nonlinear mean reversion in real exchange rates: towards a solution to the purchasing power parity puzzles
.
International Economic Review
,
42
:
1015
–
42
.
Chortareas
,
GE
,
Kapetanios
,
G
and
Shin
,
Y
.
2002
.
Nonlinear mean reversion in real exchange rates
.
Economics Letters
,
77
:
411
–
7
.
Kilian
,
L
and
Talyor
,
MP
.
2003
.
Why is it difficult to beat the random walk forecast of exchange rates
.
Journal of International Economics
,
60
:
85
–
107
.
Sarno
,
L
,
Taylor
,
MP
and
Chowdhury
,
I
.
2004
.
Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study
.
Journal of International Money and Finance
,
23
:
1
–
25
.
Narayan
,
PK
.
2006
.
Are bilateral real exchange rates stationary? Evidence from Lagrange multiplier unit root tests for India
.
Applied Economics
,
38
:
63
–
70
.
Narayan
,
PK
.
2007
.
Are nominal exchange rates and price levels cointegrated: new evidence from TAR and M-TAR models
.
Economic Record
,
83
:
74
–
85
.
Soofi
,
AS
.
1998
.
A fractional cointegration test of PPP: the case of selected members of OPEC
.
Applied Financial Economics
,
8
:
559
–
66
.
Alves
,
DCO
,
Cati
,
RC
and
Fava
,
VL
.
2001
.
Purchasing power parity in Brazil: a test for fractional cointegration
.
Applied Economics
,
33
:
1175
–
85
.
Enders
,
W
and
Chumrusphonelert
,
K
.
2004
.
Threshold cointegration and purchasing power parity in the Pacific nations
.
Applied Economics
,
36
:
889
–
96
.
Helimonen
,
K
.
1999
.
Stationarity of the European real exchange rates – evidence from panel data
.
Applied Economics
,
31
:
673
–
7
.
Carrion-i-Silvestre
,
JL
,
Barrio
,
TD
and
Lopez-Bazo
,
E
.
2004
.
Evidence on purchasing power parity in a panel of cities
.
Applied Economics
,
36
:
961
–
6
.
Narayan
,
PK
and
Prasad
,
BC
.
2007
.
Are shocks to real effective exchange rates permanent or transitory? Evidence from Pacific Island countries
.
Applied Economics
,
in press