Purchasing power parity for the MAVINS

Abstract

This paper utilizes several tests to examine the PPP theory for MAVINS (Mexico, Australia, Vietnam, Indonesia, Nigeria and South Africa) using recent monthly datasets from January 2003 to May 2016. We test for the stationarity of the variables and found that two of the variables are I(1) while one of the variables is an I(0). Since the variables are a mixture of I(1) and I(0), the paper applied the Mean Group (MG) and the Pooled Mean Group (PMG) ARDL approaches to examine the PPP theory. In choosing between the two estimators, results of the Hausman test indicates that the Mean Group estimator is preferred. Therefore, the results of the Mean Group estimator show that the error correction term which is used to measure the speed of adjustment (from short-run deviation) of the independent variables in converging to long-run equilibrium is negative and significant indicating the presence of cointegration among the variables. This implies that PPP is valid in the long-run in the MAVINS countries. Furthermore, the domestic prices make the nominal exchange rates to appreciate in the long-run and the foreign prices make the nominal exchange rates to appreciate in the short-run. Consequently, appreciation of the nominal exchange rate will cause export to be more expensive, imports cheaper and thereby reducing inflation in the MAVINS based on the data.