PURCHASING POWER PARITY BASED ON EFFECTIVE EXCHANGE-RATE AND COINTEGRATION - 25 LDCS EXPERIENCE WITH ITS ABSOLUTE FORMULATION

With the development of cointegration technique, the Purchasing Power Parity (PPP) theory has received renewed attention. Most studies have tested the theory by using data from developed countries (DCs) and some high-inflation, less-developed countries (LDCs). They have mostly rejected its empirical validity. In this paper we use the concept of effective exchange rate and quarterly, data over 1973-88 to examine the experience of 25 LDCs. For most countries we found little empirical support for the PPP.