Testing Ppp In Seacen-9 Countries

Nee, David Chai Leong (2008) Testing Ppp In Seacen-9 Countries. [Final Year Project Report] (Unpublished)

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Abstract

Many empirical studies on the Purchasing Power Parity (PPP) have mushroomed since the collapse of Bretton Woods’ system in 1973. However, there are only a few study focused on developing countries like SEACEN. The objective of this study is to test the existence of PPP in selected SEACEN-9 countries using time series analysis. In this study, two models were constructed to prevent ambiguity in interpreting our results. The period chosen for US-SEACEN Model encompassed the real bilateral exchange rates of SEACEN-9 countries from 1970Q1 until 2006Q4 for a total of 147 observations. Meanwhile in Yuan-SEACEN Model, monthly data spanning from 2001 M1 until 2006 M12 were used for a total of 72 observations. The unit root tests and stationary tests are used to test the existence of PPP in the SEACEN-9 countries. The results of unit root tests and stationary tests show that the usages of reference currencies greatly affect the stationarity of real bilateral exchange rates of SEACEN-9 countries. In US-SEACEN Model, stationary of real bilateral exchange rates were found for countries Indonesia, Korea, Malaysia and Singapore. In the other hand, we are able to found the existence of PPP between Myanmar, Nepal, Singapore, Sri Lanka and Thailand with China in China Yuan-SEACEN Model. This study has suggested some policies that can be carried out by the SEACEN member countries to gain benefit from the existence of PPP.

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