Purchasing Power Parity (PPP) with Structural Break and Mean Reversion in Real Exchange Rate: The Case of Bangladesh Taka and US Dollar

17 Pages Posted: 4 Jan 2019

See all articles by Javed Bin Kamal

Javed Bin Kamal

University of Dhaka; East West University

Date Written: December 18, 2018

Abstract

This paper aims at examining the validity of purchasing power parity (PPP) both in absolute and relative terms with reference to the long run behavior of the real exchange rate of Bangladesh Taka relative to USA dollar. In doing so, the paper tests the presence of mean-reversion in the real exchange rate by using the unit root test approach i.e. Augmented Dickey-Fuller,DF-GLS, Zivot-Andrews tests. The paper verifies the long run relationship on co-integration and VAR framework. Using monthly data (01/2007-06/2013) and annual data (1986-2014), the paper finds support for both absolute and relative PPP. While the paper finds the evidence of structural change (Quandt-Andrew test and CUSUM test) only monthly data. VECM has been applied on monthly data, as there exists co-integrating equations for only monthly data (by using Johansen test ). Unit root test indicates that the real exchange rate is I (1), that is real exchange rate of Bangladesh is not stationary.

Suggested Citation

Kamal, Javed Bin and Kamal, Javed Bin, Purchasing Power Parity (PPP) with Structural Break and Mean Reversion in Real Exchange Rate: The Case of Bangladesh Taka and US Dollar (December 18, 2018). Available at SSRN: https://ssrn.com/abstract=3303028 or http://dx.doi.org/10.2139/ssrn.3303028

Javed Bin Kamal (Contact Author)

East West University ( email )

Bangladesh

University of Dhaka ( email )

Dhaka, 1000
Bangladesh

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