Price and exchange rate determination between the Mekong river economies of Cambodia and Thailand

Abstract

The authors use cointegration techniques to test for: (i) purchasing power parity (PPP) on the bilateral exchange rate between Cambodia and Thailand; and (ii) the existence of a long‐run equilibrium relationship between the official and parallel market exchange rates. The period under study is the phase of economic transition in Cambodia from central planning to a market economy during which inflation accelerated and then decelerated. The findings for the first test support the relative version of the PPP hypothesis. The second test draws on portfolio balance theory in the context of a dual exchange rate system. The findings indicate that parallel and official exchange rates are cointegrated, implying that during the period of monetary adjustment official and parallel market exchange rates depreciated in the same proportion over the long run.