TESTING THE MODIFIED-COMBINED PPP AND UIP HYPOTHESIS IN SOUTH ASIAN ECONOMIES

Abdul Rashid ()

Applied Econometrics and International Development, 2009, vol. 9, issue 1

Abstract: In this paper, the interrelations between PPP and UIP are modified and tested for South Asian economies using multivariate cointegration approach. The study uses monthly data and sample period varies cross-country according to floating exchange rate regime. The results obtained are highly supportive of this version of the combined PPP and UIP, which takes into account the non-traded and imperfect capital mobility phenomena. Consistent with the capital enhanced equilibrium exchange rates (CHEERs) approach, the determination of the nominal exchange rate is consistent with the UIP-PPP conditional equilibrium. The interaction between PPP and UIP has consequential implications for financial reforms, an exchange rate based stabilization program and exchange rate policy alike.

Keywords: Purchasing Power Parity; Uncovered Interest Rate Parity; Equilibrium Exchange Rate; South Asian Economies; Fear of Floating; Multivariate Cointegration Analysis (search for similar items in EconPapers)
JEL-codes: C39 F29 F31 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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