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Evidence on PPP for selected Asian countries from a panel cointegration test with structural breaks

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Abstract:

The goal of this article is to examine evidence for purchasing power parity (PPP) for a panel of Asian countries, namely Malaysia, Thailand, India, Pakistan, Sri Lanka and the Philippines. Our main contribution is that for the first time in this literature we use a panel cointegration test, developed by Westerlund (2006), which allows us to incorporate multiple structural breaks. We find that using Gregory and Hansen's (1996) residual-based test for cointegration and Pedroni's (1999) panel cointegration test without structural breaks provide weak evidence of cointegration between nominal exchange rates vis-a-vis the US dollar and relative prices. However, when we use the Lagrange multiplier panel structural break cointegration test we find strong evidence of panel cointegration, providing evidence for PPP.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840701604446

Affiliations: School of Accounting Economics and Finance, Faculty of Business and Law, 221 Burwood Highway, Victoria 3125, Australia

Publication date: February 1, 2010

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