Purchasing Power Parity and the Impact of the East Asian Currency Crisis

Louise Allsopp () and Ralf Zurbruegg ()
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Louise Allsopp: School of Economics, University of Adelaide, Australia
Ralf Zurbruegg: School of Commerce, University of Adelaide, Australia

No 2003-03, Centre for International Economic Studies Working Papers from University of Adelaide, Centre for International Economic Studies

Abstract: This paper explores the impact of the East Asian crisis of 1997/98 on foreign exchange markets and purchasing power parity within the region. While many studies have attempted to test for PPP prior to these events, there has been little opportunity to test for this long run phenomenon in the post-crisis period. This study addresses the issue by applying Inoue (1999) and Johansen, Mosconi and Nielsen (2000) cointegration procedures to bilateral exchange rates deflated using consumer price indices. Along with endogenously determining a structural break at the time of the crisis, the empirical results shed light upon the significance of the East Asian crisis on long-run PPP within the region. The findings are generally supportive of PPP with the crisis leading to only shifts in long-run trends. However, the results are not homogenous across all countries which is partially attributed to how individual countries handled the crisis.

Keywords: Cointegration; Exchange Rates; Purchasing Power Parity (search for similar items in EconPapers)
JEL-codes: C22 F31 F41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2003-03
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