Long-run validity of purchasing power parity and rank tests for cointegration for Central Asian Countries

Liew, Venus Khim-Sen and Chia, Ricky Chee-Jiun and Ling, Tai-Hu (2009): Long-run validity of purchasing power parity and rank tests for cointegration for Central Asian Countries.

Abstract

This study finds that Purchasing Power Parity holds in the long-run for Azerbaijan, Kazakhstan and Kyrgyzstan, based on Breitung’s (2001) rank tests for cointegration. Results from further analysis indicates that nominal exchange rates and relative prices are nonlinearly interrelated. Trade barriers, transportation costs and government intervention in the pricing system in these countries may have resulted in the establishment of the above-mentioned nonlinear relationship.

• Item Type: MPRA Paper
• Language: English
• Keywords: Purchasing power parity; Cointegration; Nonlinear; Rank tests; Central Asia.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Anoruo, E., Liew, V.K.S. and Elike, E. (2006) Nonlinear real exchange rate behavior: are the african currencies exceptional? International Research Journal of Finance Economics, 1, 97 – 110.

Breitung, J. (2001) Rank tests for nonlinear cointegration. Journal of Business and Economic Statistics, 19, 331 – 340.

Doğanlar, M. (2006) Long-run validity of purchasing power parity and cointegration analysis for Central Asian countries. Applied Economics Letters, 13, 457 – 461.

Dumas, B. (1992) Dynamic equilibrium and the real exchange rate in a spatially seperated world. Review of Financial Studie, 5, 153–180.

Engle, R.F. and Granger C.W.J. (1987) Cointegration and error correction: representation, estimation, and testing. Econometrica, 55, 251 – 276.

Johansen, S. (1988) Statistical analysis on cointegration vectors. Journal of Economic Dynamics and Control, 12, 231 – 254.

Johansen, S. (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551 – 1581.

Liew, V.K.S. (2004) Nonlinear Adjustment of ASEAN-5 Real Exchange Rates: Symmetrical or Asymmetrical? Economics Bulletin, Vol. 6 No. 8, 1 – 8.

Liew, V.K.S., Baharumshah, A.Z. and Chong, T.T.L. (2004) Are Asian Real Exchange Rates Stationary? Economics Letters, 83, 313 – 316.

Liew, V.K.S., Chong, T.T.L. and Lim, K.P. (2003) Inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies, Applied Economics, 35, 1387 – 1392.

Liew, V.K.S., Lee, H.A. and Lim, K.P. (2008) Purchasing power parity in Asian economies: further evidence from rank tests for cointegration. Applied Economics Letters, 1-4 iPrint, DOI: 10.1080/13504850601032057.

Ma, Y. and Kanas, A. (2000) Testing for nonlinear Granger causality from fundamentals to exchange rates in the ERM. Journal of International Financial Markets, Institutions and Money, 10, 69 – 82.

Pesaran, H.M. and Shin, Y. (1999) An autoregressive distributed lad modelling approach to cointegration analysis. In: S. Storm, ed., The Econometrics and Economic Theory in the 20th Century. Cambridge: Cambridge University Press.

Phillips, P.C.B. and Hansen, B.E. (1990) Statistical inference in instrumental variable regression with I(1) processes. Review of Economic Studies, 57, 99 – 125.

Stock, J.H. and Watson, M.W. (1993) A simple estimator of cointegrating vectors in higher order integrated systems. Econometric, 61, 783 – 820.

Taylor, A.M. and Taylor, M.P. (2004) The Purchasing power parity debate. Journal of Economic Perspectives, 4, 135 – 158.

Taylor, M.P. (2003) Purchasing power parity. Review of International Economics, 11, 436–452.

Taylor, M.P. (2006) Real exchange rates and purchasing power parity: mean reversion in economic thought. Applied Financial Economics, 16, 1–17.

Taylor, M.P. and Peel, D.A. (2000) Non-linear adjustment, long-run equilibrium and exchange rate fundamentals, Journal of International Money and Finance, 19, 33 – 53.