Statistical Analysis of the Purchasing Power Parity Theory for Five Southeast Asian Countries

Abstract

For more than a decade, there has been substantial interest in testing for the validity of the Purchasing Power Parity (PPP) statistically. This paper utilised a series of statistical tests to ascertain if the PPP theory is valid for a group of five Southeast Asian countries from 2000 to 2016 using monthly data. For this purpose, we conducted four different panel unit root (stationarity) tests, two cointegration tests (Pedroni and Westerlund), and also, the vector autoregressive (VAR) model. The stationarity (unit root) tests reveal that the variables tested are non-stationary at levels but stationary at the first difference, results of the cointegration tests did not reject the null hypothesis of no cointegration meaning there is no long-run relationship between the variables and results of the VAR model did not reveal a strong short-run relationship. Based on the results, we, therefore, conclude that PPP is not valid both in the long-run and short-run in the five Southeast Asian countries between 2000 and 2016. This implies that prices of goods are expected to be different in these countries. Meaning that a businessman can make more profits from buying goods that are cheaper in one of these countries and selling at a higher rate in one of these countries where the goods are more expensive.