The Existence of Long-Run PPP: A Comparison between Developed and Developing Countries

Abstract

McNown & Wallace (1989) argued that PPP will tend to holds in less developed countries due to the domination of nominal factors in the economy. In this study we try to investigate the existence of long-run PPP in eight countries consisting four developed and developing countries. Here we show that there is a strong evidence that long-run PPP holds for Germany, United Kingdom, and Chile. Furthermore, the additional tests also show that symmetry and proportionality conditions seem to hold in the three economies. As for other five economies, long-run PPP seems to be absence. Although one step general Error Correction Model and Johansen-Juselius cointegration procedure generates conflicting result, the result of both technique do not show a tendency for PPP to hold in developing countries thus rejecting argument proposed by McNown andWallace.