Open AccessTesting the Validity of Purchasing Power Parity Theory and Dynamics of Exchange Rate Behavior (Pakistan, China, Iran and Turkey)
Author(s) -
Rana Shahid Imdad Akash,
Muhammad Mudasar Ghafoor,
Nayeem Ahmed
Publication year - 2020
Publication title -
journal of accounting and finance in emerging economies
Language(s) - English
Resource type - Journals
eISSN - 2519-0318
pISSN - 2518-8488
DOI - 10.26710/jafee.v6i1.1059
Subject(s) - purchasing power parity , economics , exchange rate , relative purchasing power parity , disequilibrium , international fisher effect , china , interest rate parity , law of one price , econometrics , monetary economics , price level , macroeconomics , financial economics , interest rate , real interest rate , nominal interest rate , geography , medicine , archaeology , mid price , ophthalmology
Purpose: This study is aimed at to observe the purchasing power parity (PPP) Theory. The purchasing power parity (PPP) is the most enduring debate of literature in international macroeconomics. It is most controversial due to various puzzles and tested with different econometric models for certain group of countries. Therefore, the PPP is valid assumption while international comparison due to use of common exchange rate and the prevalence of Law of One price.
Design/Methodology/Approach: The validity of PPP for relative countries (Pakistan, China, Iran and Turkey) was tested and analyzed for the sample period 2001 to 2018.
Findings: It is observed that exchange rates of Pakistan, China, Iran and Turkey are not consistent and constant. The deviations of PPP through structural changes identified and are not persistence over long period. Overall results reflected that there is an existence of long run equilibrium relation in between Pakistan and China as well as in between Iran and Turkey. The error correction model has confirmed the adjustment speed of short run disequilibrium to long term disequilibrium level. Implications/Originality/Value: The expected differential level of inflation has significant positive impact to exchange rate shift to Pakistan and trading activity patterns. The changes in foreign exchange market and commodity market due to economic integration are important implications for economic globalization.