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Revisiting purchasing power parity for East Asian countries using the rank test for nonlinear cointegration

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Abstract:

This study applies a simple and powerful nonlinear rank test, proposed by Breitung (2001) to test the validity of long-run Purchasing Power Parity (PPP) in a sample of East Asian countries over the period March 1985–September 2008. The empirical results indicate that PPP holds for all of East Asian countries studied and the nominal exchange rate, domestic Consumer Price Index (CPI) and the US CPI are all linearly interrelated with the exception of China. Our results have important policy implications for these East Asian countries under study.

Keywords: C22; East Asian countries; F31; nonlinear cointegration; purchasing power parity; rank test

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2012.657354

Affiliations: 1: Department of Finance,Feng Chia University, Taichung, Taiwan 2: Department of International Business,Tamkang University, No. 151, Yingzhuan Rd., Danshui Town, Taipei County 25137, Taiwan (ROC)

Publication date: July 1, 2013

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