Open AccessPurchasing Power Parity in Developing Countries: Evidence from Conventional and Fractional Cointegration Tests
Author(s) -
Augustine C. Arize,
John Malindretos,
Elias C. Grivoyannis
Publication year - 2004
Publication title -
s and p : sound and pictures
Language(s) - English
Resource type - Journals
ISSN - 1675-722X
DOI - 10.32890/ijbf2004.2.1.8343
Subject(s) - purchasing power parity , cointegration , economics , relative purchasing power parity , econometrics , estimator , stock exchange , exchange rate , developing country , stock (firearms) , financial economics , monetary economics , statistics , mathematics , finance , economic growth , mechanical engineering , engineering
This paper examines the long-run validity of purchasing power parity (PPP) for fourteen developing countries. The period examined is 1973:4 through 2002:8. The methods of Elliot, Rothemberg and Stock (1996), Kwiattkoski et al. (1992) and Geweke and Porter-Hudak (1983) are employed to detect the time series properties of exchange rates and consumer price indices of these countries. We find that these variables are nonstationary. We then utilize these data to test the PPP using both conventional and fractional approaches. Estimates of the cointegrating relations are obtained using estimators suggested by Stock and Watson (1993) and Phillips and Hanson (1990), respectively. The results are consistent with the argument that, during the recent floating exchange-rate period, PPP holds well, at least in a weak form, in developing countries where the general price level movements overshadow the factors causing deviations from the PPP.