Testing for the validity of purchasing power parity theory both in the long-run and the short-run for ASEAN-5

Abstract

The purchasing power parity theory says that the trade rates among two nations ought to be equivalent to the proportion of the total price levels between the two nations. For more than a decade, there has been substantial interest in testing for the validity of the Purchasing Power Parity (PPP) empirically. This paper performs a series of tests to see if PPP is valid for ASEAN-5 nations for the period of 2000-2016 using monthly data. For this purpose, we conducted four different tests of stationarity, two cointegration tests (Pedroni and Westerlund), and also the VAR model. The stationarity (unit root) tests reveal that the variables are not stationary at levels however stationary at first difference. Cointegration test results did not reject the H0 of no cointegration implying the absence long-run association among the variables and results of the VAR model did not reveal a strong short-run relationship. Based on the data, we, therefore, conclude that PPP is not valid in long-and short-run for ASEAN-5 during 2000-2016.