Evidence of Purchasing Power Parity for Asian Countries

This paper investigates evidence of purchasing power parity (PPP) for eight Asian countries by using two different approaches (panel unit root tests and panel cointegration tests). Moreover, an updated version of panel unit root test proposed by Pesaran (2007) which is robust to the cross-sectional dependence in a panel is employed to test a random walk behavior in the real exchange rate. Our findings show that two different approaches to test PPP do not provide identical results for two sample periods, whereas the results from two approaches show that PPP always holds in subsample period. Thus, PPP could be a useful guide for exchange rate determination and policy change in the countries in our panel.