DEVIATIONS FROM PURCHASING POWER PARITY AMONG PACIFIC RIM COUNTRIES: A VECTOR AUTOREGRESSIVE ANALYSIS

This paper investigates the dynamic relationship between actual and PPP exchange rates involving five currencies of Pacific-Rim countries over the period 1973: 1Q-J994:4Q. The result of cointegration analysis indicate no long-run relationships between actual and PPP exchange rates. The vector autoregressive framework is used to show that both real and monetary shocks influence deviations from the PPP exchange rates. However, except for the New Zealand dollar neither real nor monetary shocks can adequately explain the deviations from PPP for three other currencies. A major implication for multinational businesses is that exchange rate exposure will require innovative internal accounting and organizational practices to deal with related budgeting problems.