Purchasing power parity in developing countries: Evidence from conventional and fractional cointegration tests

This paper examines the long-run validity of purchasing power parity (PPP) for fourteen developing countries. The period examined is 1973:4 through 2002:8. The methods of Elliot, Rothemberg and Stock (1996), Kwiattkoski et al. (1992) and Geweke and Porter-Hudak (1983) are employed to detect the time series properties of exchange rates and consumer price indices of these countries. We find that these variables are nonstationary. We then utilize these data to test the PPP using both conventional and fractional approaches. Estimates of the cointegrating relations are obtained using estimators suggested by Stock and Watson (1993) and Phillips and Hanson (1990), respectively. The results are consistent with the argument that, during the recent floating exchange-rate period, PPP holds well, at least in a weak form, in developing countries where the general price level movements overshadow the factors causing deviations from the PPP.