The Validity of Purchasing Power Parity (PPP) Theory in Asean-Five Economies: The Bounds Test Approach

This study aims to examine the robustness ofdifferent Purchasing Power Parity (PPP) models by applying different types ofeconometric techniques for the ASEAN-Five economies from 1983:M1 to 2002:M9. Two versions ofthe PPP models have been estimated using the EngleGranger (EG) two-step cointegration test, the Johansen-Juselius (Jl) multivariate cointegration procedure and the bounds testing approach (or bounds test) proposed by Pesaran et al. (2001). Based on the EG and the JJ multivariate cointegration tests, we found that the absolute PPP model does not hold in the countries under investigation, while the financial data ofthe five ASEAN countries supported the validity ofthe relative PPP model when the JJ cointegration procedure were applied. The validity ofthe relative purchasing power parity was also supported when the bounds test was used in the analysis. Therefore, this study can be viewed as an additional work in providing justification for the theory ofPPP in ASEANFive economies