DEVIATIONS FROM PURCHASING POWER PARITY AMONG PACIFIC RIM COUNTRIES: A VECTOR AUTOREGRESSIVE ANALYSIS

Abstract

This paper investigates the dynamic relationship between actual and PPP exchange rates involving five currencies of Pacific-Rim countries over the period 1973:1Q-1994:4Q. The result of cointegration analysis indicate no long-run relationships between actual and PPP exchange rates. The vector autoregressive framework is used to show that both real and monetary shocks influence deviations from the PPP exchange rates. However; except for the New Zealand dollar neither real nor monetary shocks can adequately explain the deviations from PPP for three other currencies. A major implication for multinational business is that exchange rate exposure will require innovative internal accounting and organizational practices to deal with related budgeting problems.

Keywords

• ppp exchange rates
• deviation from ppp