Testing the Evidence of Purchasing Power Parity for Southeast Asia Countries

Abstract

This paper tests the validity of purchasing power parity (PPP) hypothesis using panel methods for nine countries in Southeast Asia in US Dollar and Japanese Yen. The results show that the absolute PPP is rejected by the panel unit root test for Southeast Asia countries over the January 1995 to February 2017. However, when we use developed panel unit root that accounts for structural breaks in the data, and test the PPP hypothesis over the July 1997 to August 2008, the PPP proposition seems to hold for after the Asian financial crisis period 1997 and before the global financial crisis 2008. In addition, this paper has used recent developed panel cointegration tests and found the long-run relationship between the nominal exchange rate and the relative prices – the relative PPP – and the results offer more evidence in Japanese Yen based in favor of cointegration in long-run compared with US Dollar is the base currency.