Testing Validity of Purchasing Power Parity for Emerging Asian Countries: Evidence from Thailand,Taiwan and South Korea

Abstract

     This study tests the validity of relative purchasing power parity (PPP) in Thailand, Taiwan, and South Korea. This study examines on the results of the inflation extracted from stock returns and traded-goods price index (TPI) by using least-squares regression method to test PPP in short run and unit root and cointegration test method to test PPP in long run. The results provide the additional supporting evidences that PPP seems to be valid in short run when using pure price inflation rate extracted from stock return due to high-volatility of pure price inflation rate comparing to inflation from good prices. Using inflation rate from goods price always does not satisfy short run PPP since goods price takes longer time period in adjustment than stock prices. In addition, the results provide the supporting evidences that PPP can be valid by arbitrage mechanism. Therefore, PPP should be valid with the country that has higher level of factors that support international trading activity rather than the country that has lower level of those factors.