Abstraction

Given the evident differences in the life disbursals for UK and India, we set off to look into whether the theoretical model for PPP holds in the long tally between these two states. The old literatures have aberrant decisions with the bulk contradicting the presence of PPP. Using the ADF for the unit root and co integrating between the variables, we structured our analysis on the Eviews, with the informations provided by Queen Mary University of London, School of Economics and Finance. The consequences supported the fact that PPP does non keep in the long tally between India and UK.

Contentss

ABSTRACT I

CONTENTS two

Introduction 1

LITERATURE REVIEW 2

Buying Power Parity and Law of One monetary value: 2

Absolute and Relative buying Power Parity: 3

Exchange Rate and Random walk Model: 4

PPP in the Short Run and in the Long Run: 4

Deviations from PPP: 5

Evidence of PPP: Co-integration and Stationarity Test 6

Buying Power Parity Puzzle: 7

DATA AND ANALYSIS 8

Descriptive statistics: 8

METHODOLOGY 10

Correlogram: 10

Augmented Dickey Fuller Test: 10

KPSS Test: 10

Co-integration: 11

RESULTS 12

Decision 19

REFERENCE 20

APPENDICES 23

Introduction

The buying power para theory, one of the most of import and widely used constructs in international economic sciences, used by the economic experts during the last few decennaries to measure the economic status of states and the comparative kineticss between international markets. The basic theory of Buying power para ( PPP ) , formulated in 16th century by the bookmans of the Salamanca School in Spain ( Officer, 2006 ) , states that the monetary values of common goods between two states should be equal one time monetary value have been converted to a common currency which refers to the thought of low of one monetary value. The buying power para theory has reinforced after the publication of Swedish economic expert Gustav Cassel ‘s empirical survey in the 1922.

Apart from the rudimentss, the buying power para is a ratio to stand for the comparative monetary value difference between two states for similar merchandises or group of merchandises. The devising of inter-country contrast, PPP is the initial measure based on gross domestic merchandise ( GDP ) and the constituent outgos of GDP. A state ‘s economic wellness, growing and size can be measured through GDP. PPP allows states to be viewed through a specific reference point. To see the long term theory of PPP, the outlook is to convergence the monetary values of common goods into equilibrium to extenuate the arbitrage chances. Long-run Buying Power Parity ( PPP ) is a cardinal edifice block of most theoretical accounts of exchange rate finding ( Abuaf and Jorion, 1990 ) , while the jurisprudence of one monetary value, the basic unit of buying power para ( Rogoff, 1996 ) .

It could be derived from the buying power para theory that domestic currency ‘s buying power is proportionately related with the grasp or depreciation of that currency which means if the currency appreciates buying power will increase and if depreciates the buying power will be decreased.

“ Our willingness to pay a certain monetary value for foreign money must finally and basically be due to the fact that this money possesses a buying power as against trade goods and services in that state. On the other manus, when we offer so and so much of our ain money, we are really offering a buying power as against trade goods and services in our ain state. Our rating of a foreign currency in footings of our ain, hence, chiefly depends on the comparative buying power of the two currencies in their several states ( Gustav, 1922, pp. 138-39 ) . ”

LITERATURE REVIEW

Buying Power Parity and Law of One monetary value:

The jurisprudence of one monetary value implies that indistinguishable goods or services should be traded for the same monetary value in different states if monetary values are expressed in a common currency and with premises that there would be no transit cost and governmental trade barriers ( e.g. , duties ) , in a word there should be a no arbitrage status. Simply this can be expressed by the undermentioned equation ;

Pi = EPi* aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦..aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.aˆ¦aˆ¦.. ( I )

Where Pi is the monetary value of good ( I ) in domestic currency, Pi* is the monetary value of the same good in foreign currency and E is the exchange rate expressed as domestic/foreign currency. The thought of jurisprudence of one monetary value is merely applicable to indistinguishable trade goods where as buying power para applies to the general monetary value degree that is a combination of monetary values of all the trade goods that enter into the mention basket ( Krugman and Obstfeld, 2009 ; pp.382-416 )

The McDonald ‘s Big Mac index is a cosmopolitan illustration of buying power para. The Economist published blithe reappraisal refering the monetary values of Big Mac from different states: ( 1 ) The rating of exchange rates based upon the differences of monetary values of omnipresent goods. ( 2 ) To get the comparative sense of economic end product and status across states ( Pakko and Pollard, 2003 ) . The basic ingredient of Big Mac is beef patty. As an illustration, assume that the monetary value for a beef cake in the United States Pbp $ and in France represented as Pbpa‚¬ . The mathematical equation of jurisprudence of one monetary value is as follows:

Pbpa‚¬ = E A- Pbp $ aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦..aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.aˆ¦aˆ¦.. ( two )

In this equation E represents the exchange rate between dollar and euro. Our premise is that the cost of a beef cake in the US is 1 Dollar and E= 0.845316 so the monetary value of the same pre-formed beef cakes in France should be 0.85 Euro.

Absolute and Relative buying Power Parity:

Absolute PPP-

The intuition behind the jurisprudence of one monetary value can be applied across an sum of merchandises and monetary values. Another application is consumer monetary value Index for a common basket of goods traded and monetary value difference between two states. The equation ( 1 ) can be rewritten by utilizing monetary value indices to acquire the comparative overall monetary value degrees between EU and US Pa‚¬ and P $ .

Pa‚¬ = Ea‚¬/ $ A- P $ aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦..aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.aˆ¦aˆ¦.. ( three )

Ea‚¬/ $ is the exchange rate between the euro and dollar. We can deduce the absolute version of PPP by rearranging the equation ( 2 ) , if PPP theory holds.

Ea‚¬/ $ ppp = Pa‚¬ / P $ aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ … ..aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.aˆ¦aˆ¦.. ( four )

From the equation 3, to keep the buying power para, the composing of the CPI must be indistinguishable purely. Although, empirical grounds shows that the international monetary value indices are varied harmonizing to the different goods and different weights assigned to those goods. Furthermore, international indices complication is that they must be constructed from similar base old ages ( Suranovic, 2006 ) .

The accommodation of the jurisprudence of one monetary value to PPP conveys a specific step. In the instance of beef patty arbitrage illustration given supra, there was an arbitrage chance if there was monetary value difference between two markets and the exchange rate was changeless. Here, the effort is to keep the monetary value degrees changeless and the exchanges rate fluctuates. This can give a brief thought how the exchange rate determines PPP ( Suranovic, 2006 ) .

Relative PPP-

The comparative PPP refers to the fluctuations of monetary value degrees and exchange rates are correlated. The fluctuation of rising prices rates across the states are attributed to the alterations in existent exchange rates. Therefore, the equation for comparative PPP can be written as follows:

( Ea‚¬/ $ , t – Ea‚¬/ $ , t-1 ) / Ea‚¬/ $ , t-1 = a??a‚¬ , t – a?? $ , t aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.aˆ¦aˆ¦ … . ( V )

Or

% a?† Ea‚¬/ $ = % a?† Pa‚¬ – % a?† P $ aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦.aˆ¦.aˆ¦aˆ¦.. ( six )

In equation 4.1 can be identified that the per centum alteration is exchange rates for a given period of clip will be equal to the difference in rising prices of the euro and dollar, a??a‚¬ and a?? $ severally ( Suranovic, 2006 ) . We can deduce equation 4.2 by seting equation 4.1 in a somewhat different method, shows that the difference in per centum alterations in monetary value degrees in EU and US is knows as alterations in comparative in rising prices which is the direct determiner in the comparative alterations in exchange rates between the two states ( Pakko and Pollard, 2003 ) .

This is the appraisal which many economic experts and theorist affix their empirical analysis to turn out the cogency of PPP.

Exchange Rate and Random walk Model:

Harmonizing to Abuaf and Jorion ( 1990 ) and Rogoff, ( 1996 ) , for long clip research workers found it really hard to reject the hypothesis that existent exchange rates follow a random walk under drifting exchange rate governments which means there is no verification of any convergence toward PPP in the long tally. Before that the same consequence was found by Roll ( 1979 ) , Darby ( 1980 ) , Frenkel ( 1981 ) and Adler and Lehmann ( 1983 ) in existent exchange rate connoting that there is no possibility for buying power para to keep in the long-term. On the other manus, some research workers have claimed that nominal exchange rates follow a random walk ( Mussa, 1979 and Meese and Rogoff, 1983 ) . Frankel ( 1986, 1990 ) has claimed that the deficiency of power, deficiency of long skyline clip series informations, was the ground why research workers fail to reject the random walk theoretical account of existent exchange rates.

PPP in the Short Run and in the Long Run:

“ Most through empirical observation literate economic experts instinctively believe in some discrepancy of buying power para as an ground tackle for long-term existent exchange rates ( Rogoff, 1996 ) . Narayan, ( 2006 ) has argued that policies have of import consequence on whether PPP holds or non in the long tally because although exchange rates can be predicted by PPP model the policy shapers have control over exchange rates when overvalued or undervalued. The long skyline dataset, some economic experts have recognized as the power of the trial ( for illustration Frankel, 1990 ) , is really of import to turn out any grounds of buying power para ( Moosa, 1994 ) . In the floating exchange rate status, as Serletis and Gogas, ( 2004 ) argued, it is hard to happen grounds of PPP. On the other manus, some other research workers ( Cheung and Lai, 1993 ; Pippenger, 1993 and Kugler and Lenz, 1993 ) have got supportive grounds for PPP in drifting exchange rate status by utilizing high-frequency monthly informations. Numbers of recent surveies have ended with grounds that existent exchange rates tend toward buying power para in the really long tally ( Rogoff 1996 ) .

Deviations from Palatopharyngoplasty:

A figure of factors can be involved to do PPP deviated from its construct. Transaction costs, monetary value favoritism policies, capital controls, trade barriers, differences in assets ‘ hazard and liquidness, different ways of building monetary value indices, etc. are the chief causes as identified by Duarte, ( 2005 ) . Further, the inaccessibility of strong econometric methods to analyze PPP was another ground for divergence from PPP in the past but fortuitously this job has well been reduced after the development of co-integration trials and unit root trials. Though, this is still unconvincing to fling a theory that makes strong intuitive logic. The major grounds are mentioned below why PPP may non keep:

Transportation Costs-

The theory of jurisprudence of one monetary value and PPP assumes that transit costs are negligible. However, reassigning merchandises from one market to another market can significantly add some costs to goods. This will make extra divergence when the merchandise is utilised to the basket of goods in a CPI. A research that calculates transit costs add 7 % to the monetary value of US meat imports, dairy merchandises includes 6 % and 16 % to the vegetable imports ( Pakko and Pollard, 2003 ) .

Duties and Taxes-

To keep PPP revenue enhancements and duties are abstracted. Furthermore unequal revenue enhancements or duties on imported or exported goods are non imposed across the states for non to divide true monetary value degrees between markets. The theory of Cassel ( 1918 ) stated that, “ If trade between two states is more hampered in one way than in the other, the value of the money whose export is comparatively more restricted will, fall in the other state, beneath the buying power para ( Cassel, 1918 ) . ”

Costa of Non-tradable Goods-

The theory of PPP predicts that the cost of goods such as Big MAC should be the same across states in which the BIG MAC is traded after the trade barriers is crossed out. However the cost of goods can even change within the same state depending on costs to rent and or lease the eating house infinite and the public-service corporations cost. Rents and public-service corporations are treated as non-tradable goods. As an illustration, rents are cheaper in Boise, Idaho instead than Manhattan, NY ( Pakko and Pollard, 2003 ) . The BIG MAC selling and selling cost can be varied from state to state. In economic science rewards have been termed as non-tradable goods. Therefore non-tradable goods account for 94 % of a BIG MAC monetary value ( Ong, 2003 ) . Harmonizing to Balassa ( 1964 ) and Samuelson ( 1964 ) , the costs non-tradable goods have a greater axial rotation on to divert from PPP because of its correspondence with the productiveness of a state.

Different Price Indices-

Harmonizing to Layton and Stark ( 1990 ) , different types of correlativity between three alternate monetary value indices and PPP have been tested on the footing of different degree of monetary values for the same goods such as Wholesale Price Index ( WPI ) , Consumer Price Index ( CPI ) and GDP deflator to corroborate the sensitiveness of the pick of monetary value indices. As PPP theory has been generated from the jurisprudence of one monetary value, the appropriate monetary value index should be related to the traded goods. Bleaney ( 1992 ) , for illustration, has used the sweeping monetary value index alternatively of the consumer monetary value index because the consumer monetary value index includes a important constituent of non-tradable goods which deviates PPP. That is why Officer, ( 1980 ) was loath to utilize the sweeping monetary value index, because it biases consequences in favor of accepting PPP and this is the instance why researches ( Kim, 1990 ; MacDonald, 1988 ; McNown and Wallace, 1989 ) utilizing sweeping monetary value have found consequences supportive to the PPP.

Evidence of PPP: Co-integration and Stationarity Test

“ The statistical theory of co-integration was foremost articulated by Granger in 1983, with a more complete action given by Engle and Granger in 1987 ( Layton and Stark, 1990 ) . ” Since so, there are so many researches have been conducted to prove the buying power para theory on the footing of the relation between PPP, existent exchange rate and the monetary value degree ( Moosa, 1994 ) . Depending on the type of trial those researches can be classified into four different groups. The first group, in the late 1980 ‘s and early 1990 ‘s ( Taylor, 1988 ; Karfakis and Moschos, 1989 ; Kim, 1990 ; Patel, 1990 and Bleaney, 1991 ) , has tested the co-integration between nominal exchange rate and monetary value degrees ( both domestic and foreign monetary value degree ) and in consequence some of those found co-integration relationship between nominal exchange rate and the monetary value degrees while others found no co-integration. The 2nd group, in the early 1990 ‘s ( Mark, 1990 ; Grilli and Kaminsky, 1991 and Flynn and Boucher, 1993 ) , has studied buying power para theory by proving the univariate unit root to see whether the existent exchange rates are stationary or non and they have got assorted consequence. The 3rd group, in the late 1990 ‘s and early 2000 ‘s ( Frankel and Rose, 1996 ; Papell and Theodoridis, 1998 ; O’Connell, 1998 ; Fleissig and Strauss, 2000 ; and Ho, 2002 ) , has employed panel unit root techniques to prove the stationarity of existent exchange rates and the findings were besides assorted where merely Papell, ( 2002 ) and Ho, ( 2002 ) found supportive consequence for PPP and others did non. Finally the last group, the most recent surveies ( Taylor et al. , 2001 ; Chortareas et al. , 2002 ; Kilian and Taylor, 2003 ; Chortareas and Kapetanios, 2003 and Sarno et al. , 2004 ) has observed stationarity of existent exchange rates using nonlinear unit root techniques where Taylor et al. , ( 2001 ) , Chortareas and Kapetanios, ( 2003 ) and Sarno et al. , ( 2004 ) found grounds of stationarity in favor of buying power para.

Buying Power Parity Puzzle:

It has been proved by a figure of surveies that the PPP is an efficient tool to understand the behavior of exchange rates and their equilibrium provinces in the long tally. The consensus is that the speed of overlapping is comparatively slow compared to the overshooting to the exchange rates in the short tally ( Froot and Rogoff, 1994 ) . Despite anything to the contrary, there has been much statement on the causes of the exchange rate volatility in the short tally. So, the hard job is how do we do compatible with the unpredictable tremendous volatility of short term exchange rates with the highly slow rate of the disciplinary force of PPP? As we have discussed above the mistakes that deviate PPP is non-tradable goods. But there is a recent survey by Engel ( 1999 ) that shows that the other mistakes imputing PPP to divert nil related to related to monetary values of non- tradable goods ( Charles, 1999 ) .

DATA AND ANALYSIS

In our pursuit for obtaining the grounds for the long tally PPP, the relevant states for our analysis are UK and India. The information for CPI ( consumer Price Index ) has been utilized for both the states since it is an appraisal of the mean monetary value of consumer goods and services purchased by the families. Besides the exchange rates for both the states have been obtained in order to set up a bilateral exchange rate. The information set runing on a period of 48 old ages has been employed get downing from January 1957 boulder clay December 2004. The norms of the day-to-day exchange rate on the quarterly footing have been utilised which gives us a sum of 48 observations. The information has been obtained from the database of Queen Mary university of London, School of Economics and Finance.

Descriptive statistics:

Figure 1: Descriptive statistics of CPI of UK

Figure 2: Descriptive statistics of CPI of India

A basic descriptive statistical analysis of the two independent variables which are the CPI for India and UK is shown in the figures ( Figure 1 and 2 ) . It can be concluded from this analysis that on a comparative graduated table, India ‘s information seems to be more volatile than UK. The standard divergence is big for India but on the other manus there is non much difference in the kurtosis value bespeaking that the sudden leap in the informations are about similar. The Jarque-Bera trial values which indicate whether the information is usually distributed or non might non be valid in this instance because the sample size is little to turn out normalcy. For accurate steps in Jarque-Bera the sample size has to be big plenty. Furthermore, the informations besides indicates a gradual rise tendency for both variables for the given clip period.

Methodology

The nucleus docket for transporting out this trial is to happen out whether the PPP holds in the long tally or non. The PPP theory provinces that when calculated in the indistinguishable currency, the long tally domestic and the foreign monetary value degrees are equal. Law of one monetary value is at the bosom of the footing of this theory. Assuming that all goods are tradable, 0 conveyance costs, no barriers to merchandise, perfect homogeneousness of domestic and foreign goods, and ( normally ) perfect competition, this Law says that free trade must take to equal monetary values across states ( Rogoff, 1996 ) . To look into whether it holds in the long tally or non, we have to undergo the undermentioned processs.

Correlogram:

The first thing to find before we really get down our analysis is to prove for unit root that is to see if our clip series informations is stationary or non. A preliminary measure before that is to look into the stationarity using the correlogram map. It would enable us to bring forth autocorrelation which refers to the correlativity of a clip series with its ain yesteryear and hereafter values.

Augmented Dickey Fuller Test:

In order to continue with the unit root trial, we have performed the augmented dickie Fuller ( ADF here after ) trial.

a?†yt = I± + I?t + I?yt-1 + I?1a?†yt-1 + … .. + I?pa?†yt-p + Iµt aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( seven )

The void hypothesis of the Augmented Dickey Fuller trial is

H0: I? a•? 0

The I? bing zero corresponds to the state of affairs where the random walk hypothesis persists. Since we have to look into for the possibility that the long tally PPP holds, if the void hypothesis prevails, it would intend that the information is non stationary. The alternate hypothesis is

H1: I? aˆ? 0

In instance the void hypothesis is rejected, there exists a tendency in the clip series which needs to be addressed. The methodological analysis hence used is to happen the first degree difference for the given informations set in order to take the random walk.

KPSS Trial:

KPSS ( Kwiatkowski-Phillips-Schmidt-Shin trials ) is besides used to prove stationarity. These trials are fundamentally intended to complement the unit root trials such as ADF trials. The given hypothesis takes a contrary signifier when it comes to these trials. The void hypothesis here corresponds to the stationarity of the informations.

H0: I? a•? 0

H1: I? aˆ? 0

Once both these trials have been performed, the uniformity between the consequences can be determined.

Co-integration:

If the above consequences do non bespeak the presence of integrity or stationarity between the variables, we have to fall back for a weaker signifier of proving. Through co-integration we can find whether at that place exists any signifier of relationship between the variables even if there is being of random walk separately. Co-integration is a belongings of clip series variables. Even if the given variables are non stationary themselves, the series would be stationary if the additive combination of the series is stationary. The co-integration analysis facilitates in proving a long-term relationship between two variables. Engle and Granger ( 1987 ) stated that if two non-stationary variables are integrated of the same order, there will be a relationship between the two given that the residuary is stationary. Hence this is known as a two measure proving where foremost we run a arrested development and save remainders, and so ADF is applied on the residuary to look into for the presence of stationarity.

Yt = I± + I?Xt + ut aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( eight )

Where Yt is the exchange rate which is the dependent variable, and Xt would be the independent variable. In our analysis since we have used two independent variables that is the CPI of both India and Uk, the equation involves another variable every bit good. The hypothesis hence for this trial will take the undermentioned signifier ;

Holmium: variables are non co-integrated

H1: variables are co-integrated

In order for PPP to keep in the long tally, the void hypothesis here should be rejected.

Consequence

FIGURE 3: CORRELOGRAM FOR BILATERAL EXCHANGE Rate

FIGURE 4: CORRELOGRAM FOR CPI UK

FIGURE 5: CORRELOGRAM FOR CPI INDIA

For all the variables in our analysis, we started of proving for the correlativity for each of them. The slowdown here were kept at the maximal degree for better consequences. The autocorrelation for all the three variables does non demo being of any sort of stationarity. In instance of a stationary information the autocorrelation grid bit by bit descends down to about zero, but as for our variables it descends into the negative side bespeaking that the information is non stationary. Hence there was a footing for us now to continue to the following measure.

Table 1: Unit of measurement ROOT ( ADF ) FOR BILATERAL EXCHANGE Rate

Table 2: Unit of measurement ROOT ( ADF ) FOR CPI UK

Table 3: Unit of measurement ROOT ( ADF ) FOR CPI INDIA

The unit root trial i.e. the ADF trial consequences for all the variables besides depicted a homogenous consequence. Harmonizing to the t-stats consequence in table 3, the value is -1.87 which is within the credence part at 99 % , 95 % and even 90 % assurance interval. The higher chance ratio besides depicts that the information is non-stationary. Similarly in the instance of the independent variables, the value of the t-stat is -1.38 for UK and -1.87 for India in table 2 and 3 severally. These values besides depict non-stationary behavior as they are within the 95 % and 99 % assurance interval. The consequences of all the variables at this point indicate that the void hypothesis could non be rejected and it still prevails.

Table 4: Unit of measurement ROOT ( ADF, 1st difference FOR BILATERAL EXCHAGE Rate

Table 5: Unit of measurement ROOT ( ADF, 1st difference FOR CPI UK

Table 6: Unit of measurement ROOT ( ADF, 1st difference FOR CPI INDIA

At the first difference degree trials for the variables for ADF, there was eventually an indicant of stationary behavior. The t-stat value in the tabular array 4 is -5.7 which is outside the credence part at the 99 % , 95 % and 90 % assurance degrees. Similarly the t-stat value of -7.3 for UK and -7.1 for India in the tabular array 5 and 6 severally besides lie outside the credence part bespeaking that at a weak degree there exists some signifier of stationary behavior. Another indicant for this stationary behavior is the chance statistics for all the variables which are about near to nothing for all of them. The Durbin Watson analysis is below 2 for all the variables in the tabular array 4, 5 and 6 depiction that a correlativity might be between the variables. Hence in this state of affairs the void hypothesis was rejected and the alternate hypothesis was accepted for stationarity.

Before traveling on to the co-integration analysis, KPSS was done in order to complement the consequences of ADF and to look into consistence. The consequences from the tabular array 8, 9 and 10 ( See in the appendices ) show the KPSS stats for the first degree difference for all the variables i.e. exchange rate, CPI UK and CPI India severally. All the comparative LM stat values which are 0.13 for exchange rate, 0.34 for UK 0.23 for India autumn within the credence degree. For KPSS analysis, if the values fall within the credence degree it shows that information is stationary. Hence after this decision every bit good, the co-integration could be started.

Table 7: Unit of measurement ROOT ( ADF ) FOR Remainder

The carbon monoxide integrating had to be carried out between 3 variables in our trial. There was one dependent and two independent variables, and the relevant equation was inserted in the Eviews to acquire the needed consequence. The t-stat value for the residuary trial is -2.57 which harmonizing to the tabular array 7, does fall within the credence degree at 95 % and 99 % for the 3 variable trials for co-integration. Hence the consequence shows that the PPP does non keep in the long tally.

Decision

From the really beginning of the 1970s, the Purchasing Power Parity theory has become the centre point of economic research and the debateable topic for the international economic experts. In that epoch, research work that has been done theoretically recommended that exchange rates should be linked to comparative monetary value alterations with divergences that might be merely minimum or fleeting, where every bit empirical analysis could happen lone weak grounds in support of buying power para, and even these weak findings implied an highly slow rate of reversion to PPP of, at best, 3 to 5 old ages.

The grounds resulted from our empirical survey is non supportive for the PPP theory which means PPP does non keep in the long tally. The consequence from our survey is consistent with the consequence of many other research workers such as Frankel and Rose ( 1996 ) , Papell and Theodoridis ( 1998 ) , O’Connell, 1998 and Fleissig and Strauss ( 2000 ) and so on.