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Cointegration Tests of Purchasing Power Parity: the Case of the Thai Baht *
Author(s) -
Hataiseree Rungsun
Publication year - 1995
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/j.1467-8381.1995.tb00025.x
Subject(s) - purchasing power parity , cointegration , economics , relative purchasing power parity , exchange rate , econometrics , empirical evidence , monetary economics , macroeconomics , philosophy , epistemology
This paper will examine the validity of the purchasing power parity (PPP) hypothesis for the Thai baht vis‐à‐vis the currencies of Thailand's key trading partners under the new exchange rate regime using the cointegration technique. The major conclusions obtained from this empirical analysis may be broadly summarized as follows. First, the empirical evidence, based on the DF and ADF statistics, seems to suggest that the nominal exchange rates and relative prices are well characterized as non‐stationary I (1) processes. Second, the cointegration analysis provides no evidence in support of a long‐run equilibrium relationship between bilateral nominal exchange rates for the Thai baht vis‐à‐vis the currencies of Thailand's major trading partners and the corresponding relative price ratios. This implies rejection of PPP for these countries. If this is the case, considerable care should be taken in assessing the long‐run implications for the real exchange rate, and thus competitiveness against Thailand's key trading partners, of shocks to the nominal exchange rate.