Purchasing Power Parity in Developing - 8 Countries: Evidence from Time Series Data

Abstract

Purpose: This study aims to empirically assess the rationality of Purchasing Power Parity (PPP) theory in Developing-8 (D-8) countries. For this purpose, the data of PPP, Consumer Price Index (CPI), and Wholesale Price Index (WPI) were used from 1990 to 2015, with annual frequency. Methodology: This paper attempted to set up the long-run association between the nominal exchange rate and relative prices as opposed to old investigations. This study applies the ADF, PP, and the recently developed KPSS test to test data stationarity, followed by a cointegration test, granger casualty test, and vector error correction model. Findings: Time-series properties of this study specify that the real exchange rates are stationary for sample countries, indicating PPP holds in these countries, whereas Cointegration results demonstrate that a strong cointegrating relationship exists among the variables of Bangladesh and Turkey only. Practical Implications: The findings of the study have some policy implications, which suggest some recommendations for bilateral trade among these countries. Originality: Findings of the paper suggest that the structure of these developing eight (D-8) countries tends to be less diverse, and fewer economic changes occur than in developed countries. Limitations: Findings of this paper can vary on a different set of databases depending on the changing pattern of CPI and WPI