Revisiting Purchasing Power Parity in Pakistan
Abstract
The study aims to revalidate the purchasing power parity hypothesis in Pakistan using yearly exchange rate data from 1980-2012. The Augmented Dickey-Fuller and Zivot-Andrews unit root tests were used to validate the long run purchasing power parity hypothesis. The results suggest that the Augmented Dickey-Fuller test failed to validate the PPP hypothesis in Pakistan. However, the Zivot-Andrews unit root test with structural break provides evidence to support the PPP hypothesis. The finding is not consistent with several prior studies which did not find evidence to support the PPP hypothesis. Future studies may analyze the PPP hypothesis in other developing countries using advanced time series approaches.Keywords: Purchasing power parity, exchange rate, unit root test, structural break, Pakistan.References
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