The Validity of Long-run Purchasing Power Parity in the South Asian Countries

Mohammad Yunus

Bangladesh Development Studies, 2000, vol. 26, issue 1, 99-124

Abstract: The paper examines the validity of long-run Purchasing Power Parity (PPP) and the so-called Generalized Purchasing Power Parity (G-PPP) in five South Asian countries, using the relatively new Johansen cointegration approach. It has been demonstrated that weak-form PPP finds considerable support from data, while the strong-form version of the hypothesis does not, irrespective of whether the official or the parallel market exchange rates are used in the analysis. Moreover, G-PPP seems to hold among these countries. The major policy implication of the findings of the paper is that if the monetary authorities in the South Asian countries wish to stabilize domestic prices or reduce persistent balance of payments deficits they must try to lower the external value of their currencies. These countries can also reap the benefits of co-operation in the core areas of trade, manufactures and services through elimination of various restrictions on regional trade.

Keywords: Purchasing power parity; Real exchange rates; Currency; Gray markets; Development studies; Random walk; Foreign exchange rates; Statistical variance; Empirical evidence (search for similar items in EconPapers)
JEL-codes: A12 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:badest:0391

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