Testing PPP Hypothesis In Major Asean Economies: Does Data Generating Process Matter?

Abstract

This study employs the Johansen and Juselius (1990) cointegration test and the recently proposed) non-parametric cointegration methodology to test the purchasing power parity for five major ASEAN economies-Indonesia, Malaysia, the Philippines. Singapore , with U.S. as reference. Both tests are used jointly since this approach provides 10 address the issue of whether the underlying data generating process has strong the empirical cointegration testing of PPP hypothesis. Using the Johansen and integration approach, the null hypothesis of no cointegrating vector for all the five niries cannot be rejected. Further analysis using the Bicrens's method provides for the PPP proposition for Malaysia, Singapore and Thailand. The discrepancy findings from both techniques is interpreted as a consequence of significant non- in the adjustment process of real exchange rate towards its PPP equilibrium level. . these findings provide empirical evidence against the robustness of the Johansen method at detecting cointegration when the data generating process is non-linear. study points to the need 10 examine the underlying dynamics of the data generating further empirical testing of PPP hypothesis, especially those utilizing Johansen