Does purchasing power parity hold in developing countries? An application to the Asian countries (Indonesia, Korea, Malaysia, Singapore, Thailand, Philippines)

In this dissertation we tested the absolute version of PPP in six Asian countries: Indonesia, Korea, Malaysia, Singapore, Thailand, and the Philippines for the current float. Standard unit root tests and cointegration techniques are used to test PPP in the Asian countries. No evidence of real exchange rates stationarity is found when no time trend is added to the real exchange rate equation and little evidence of cointegration is detected using the Engle-Granger and Johansen procedures. However, we are able to find evidence of stationarity in the real exchange rates for Indonesia, Korea, and Thailand when a time trend is added to the real exchange equation with a half-life of less than a year. Evidence of cointegration is detected for Indonesia when the CPI and WPI-based relative prices are used and for Korea when the WPI-based relative price is used. Using the Johansen procedure evidence of cointegration is found for Korea and Singapore when the CPI-based relative prices are used and for Indonesia when the WPI-based relative price is used.; Using the KPSS test of the null of trend stationarity we are able to find evidence of stationarity in the real exchange rates for all countries except for Singapore's CPI-based real exchange rate. Testing the null of cointegration shows that nominal exchange rates and CPI-based relative prices are cointegrated for all the countries. We are unable to find evidence of cointegration for Indonesia, Korea, and the Philippines when the WPI is used.; Using confirmatory data analysis we are able to confirm stationarity of CPI and WPI-based real exchange rates for Indonesia and Thailand. Non-stationarity is confirmed for Singapore and the Philippines when the CPI-based real exchange rate is used. No conclusive decision is reached for the rest of the countries. Cointegration is confirmed for Indonesia when the CPI-based relative price is used and no-cointegration is confirmed for the Philippines when the WPI-based relative price is used. We are unable to reach a conclusive decision for the rest of the countries.