Purchasing Power Parity Hypothesis: Empirical Validity of Purchasing Power Parity in the Long Run among the Developing and Developed Countries Using Co-integration and OLS Techniques.

Abstract

This study finds the empirical validity of exchange rate and price relationship implied by purchasing power parity among the seven countries .i.e. (Australia, Canada, Pakistan, India, Japan, Spain and Korea) using the Augmented Dickey Fuller, Engel Granger, Johansen and ordinary least squares econometrics techniques based on quarterly data instead of annually data .We have used both developing and developed countries in the PPP testing and compared the econometric results of developing and developed countries with each other. Using the quarterly data over the time period of 1961 to 2010, We have found the long run validity of purchasing power parity theory among the three developing and four developed countries. We have applied different econometric methodologies, PPP results differ among different econometric techniques. So, it can be implied that choice of price level and appropriate econometric methodology is very important in the PPP testing.

Keywords: Purchasing power parity; Exchange rate; Developed and Developing countries