Econometric testing of purchasing power parity in less developed countries : fixed and flexible exchange rate regime experiences

Abstract

he aim of this thesis is to investigate the purchasing power parity (PPP) hypothesis for sixteen developing countries during their fixed and flexible exchange rate experiences over the period 1957:01–1999:12. The main contribution of this thesis to the empirical literature on PPP is that our study is the first one considering PPP hypothesis on alternative exchange rate regimes for LDCs from all over the world. The bilateral exchange rates of 16 less developed countries (LDC) and the US, and their respective price levels are considered. Consumer Price Index (CPI) is used as to represent the price level. Three different methodologies have been employed to test PPP hypothesis. These are unit root tests (Dickey and Fuller (1979), DF; Augmented Dickey Fuller (1981), ADF; Phillips and Perron (1988), PP), Engle-Granger (1987) cointegration technique and Johansen multivariate VAR methodology (1988). As a consequently, we can not conclude from our study that PPP hypothesis work well under fixed or flexible regime periods, because we could find just a little and nearly equal number of evidences under these alternative regimes.