Purchasing Power Parity for Emerging Markets: Evidence From Panel Cointegration Tests

This study examines the purchasing power parity (PPP) of 21 emerging markets using different panel co-integration tests. First, Pedroni (1999, 2004), Kao (1999) and Johansen Fisher (1999) tests are applied and Pedroni (2000) panel FMOLS is used to estimate the long-run parameters. The results provide strong evidence for the weak version of PPP. Then, Westerlund (2007) panel co-integration test considering cross section dependency (CD) is employed. In contrast, at this time, results clearly indicate that PPP is not hold. Additionally, when 21 emerging markets are subdivided into emerging Asia, emerging Europe, emerging Latin America and Africa, similar results are found. Therefore, results point out the importance of considering the CD in panel co-integration tests. Based on this analysis, it is concluded that policymakers in these emerging markets should not use purchasing power parity to determine the equilibrium exchange rate.