Testing for Purchasing Power Parity in the Long-Run for ASEAN-5

For more than a decade, there has been a substantial interest in testing for the validity of the purchasing power parity (PPP) hypothesis empirically. This paper performs a test on revealing a long-run relative Purchasing Power Parity for a group of ASEAN-5 countries for the period of 1996-2016 using monthly data. For this purpose, we used the Pedroni co-integration method to test for the long-run hypothesis of purchasing power parity. We first tested for the stationarity of the variables and found that the variables are non-stationary at levels but stationary at first difference. Results of the Pedroni test rejected the null hypothesis of no co-integration meaning that we have enough evidence to support PPP in the long-run for the ASEAN-5 countries over the period of 1996-2016. In other words, the rejection of null hypothesis implies a long-run relation between nominal exchange rates and relative prices.