||Purchasing Power Parity (PPP) is an important theory of exchange rate determination. The documents probing into the PPP theory are voluminous nowadays; however, there hasn’t been an agreed conclusion yet.|
In this paper, we apply the Panel Lagrange Multiplier unit root
test, a newly developed panel unit root test that allows for heterogeneous
breaks, under both the null and the alternative, in both the
level and trend of the series under investigation, addressed by Im, Lee
and Tieslau (2010). The validity of PPP theory can be examined by testing the stationary of real exchange rates. We use the data chosen from the countries of Asia, including Taiwan, Japan, Korea, Tailand, Indonesia, Hong Kong and Singapore to proceed the positive analysis.
The result shows that no matter we use CPI or WPI as the price index, both considering more about the structure breaks and using the panel unit root test strongly support the PPP theory. And it also shows that when using the WPI as the price index, there would be much more countries support the PPP theory.