Testing validity of purchasing power parity for emerging Asian countries : evidence from Thailand, Taiwan and South Korea

Abstract

This study tests the validity of relative purchasing power parity (PPP) in Thailand, Taiwan, and South Korea. This study examines on the effect of the inflation extracted from stock returns (Chowdhry, Roll, and Xia, 2005) and other inflation proxies in short run and long run. In short run, the results of least-squares regression method do not reject the hypothesis of short run PPP at 95% confidence level in the case of Thailand and Taiwan, using the extracted inflation as inflation proxy. In the case of South Korea, the result rejects the hypothesis at 5% significance level. The results also reject the hypothesis of short run PPP in the case of other inflation proxies. In long run, this study tests evidences of PPP in both strong form and weak form, using unit root and cointegration tests. The results support the validity of PPP in strong form at 5% significance level in the case of Thailand, using traded goods price index (TPI) as price proxy. The results also support the validity of PPP in weak form at 5% significance level in the case of Taiwan, using TPI as price proxy. In other cases, the results do not support the PPP.