The ASEAN experience of the purchasing power parity theory

Abstract

We used panel data analysis to evaluate the relative purchasing power parity (PPP) hypothesis of the ten ASEAN member countries between 1973 and 2015. We incorporated the cross-sectionally augmented panel unit root test as proposed by Pesaran (J Appl Econ 22:265-312, 2007). For panel cointegration analysis, we employed the four error-correction-based Westerlund (Oxf Bull Econ Stat 69:709-748, 2007) panel cointegration tests. The Westerlund (Oxf Bull Econ Stat 69:709-748, 2007) tests are general enough to permit a large degree of heterogeneity, both in the long-run cointegrating relationship and in the short-run dynamics, and dependence within as well as across the cross-sectional units. To check the robustness of the results, we further estimated the cointegration test excluding Indonesia and Brunei. The findings support our initial results. Further, all the results overwhelmingly support the relative PPP hypothesis. Consequently, the monetary authority would be able to implement a self-regulating monetary policy. It would also be able to control the exchange rates.

The Analysis Between Purchasing Power Parity and Exchange Rates, Inflation and Gross Domestic Product in Developing and Developed Countries Asia and Europe During Covid-19 Pandemic

“…This was done because the Canadian economy was developing rapidly. PPP applies to Asian countries, including China, which experience long-term flexible and convergent exchange rates (Murad & Hossain, 2018). If there is a relative change in the exchange rate and a relative change in the price level ratio, then the monetary authority can carry out its own self-regulating policies to harmonize the economy and also be able to control exchange rate fluctuations.…”

How Do Inflation Rate, BI Rate, and Balance of Trade Directly Affect IDR to USD Exchange Rate and Indirectly Affect IDX Composite Index in Initial Stage of Covid-19 Outbreak?

“…Although PPP remains a valuable concept, there is evidence of considerable deviation from the theory's implementation in the real world (Iyke & Odhiambo, 2017). The purchasing power parity theory also predicts that the decline in the purchasing power of the domestic currency (indicated by an increase in the domestic price level) will be accompanied by a proportional depreciation of its currency in the foreign exchange market (Murad & Hossain, 2018).…”