Does Purchasing Power Parity Hold Between Asian Economies Before and After the Financial Crisis? Evidence from the Time-Series Model

Abstract

In exchange rate determination models, the purchasing power parity (PPP) acts as a fundamental theory, which provides the basis for exchange rate determination across countries respectively. The main objective of this study is to investigate if there exists long-run purchasing power parity in the long run between the Asian economies and developed economies. This will help to understand the long-run exchange rate determination in these countries and helps to make effective monetary policies. This study tests the long-run PPP relationships between Asian economies (China, Japan, Singapore) with the UK and the US respectively. It is important to observe whether PPP holds between Asian economies and the economies of the UK and US by using time-series analysis respectively. Johansen Cointegration test is used to examine the relative PPP among these countries on full sample and sub-samples before and after the global financial crisis respectively. In full sample and subsamples, the Cointegration results show that PPP holds Asian economies (China, Japan, and Singapore) with the UK and the US respectively. This study finds significant evidence to accept that PPP holds which implies that the domestic prices of Asian economies are influenced by the US and UK prices and it explains a significant amount of variation in their domestic prices and inflation.