Purchasing Power Parity for Developing Countries: Evidence from Panel Unit Root Tests
DOI:
https://doi.org/10.1956/jge.v19i4.706Keywords:
Purchasing Power Parity, Panel Unit Root, Geographic region.Abstract
The current study focuses on examining the robustness of the PPP theory for a sample of 40 developing economies categorised on the basis of geographical location. For this purpose, all the data series of real exchange ratesof selected economies have been checked for stationarity by employing three different methods of panel unit root tests namely Levin, Lin and Chu, ADF-Fisher Chi-square and PP-Fisher Chi-square test. The findings support the existence of strong PPP for the groups of South Asian, South-East Asian and Latin American countries. On the contrary, the group of African and Middle Eastern nations fail to exhibit stationarity in real exchange rate and thus do not support the validity of PPP for these group of nations.This implies that external balance of an economy where PPP holds will not be influenced by long-run or short-run shocks but for the nations where the validity of PPP is rejected the internal economic shocks pose a challenge for the external economic balance of home currency exchange rate.
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