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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht*
**

This paper will examine the validity of the purchasing power parity (PPP) hypothesis for the Thai baht vis-d-vis the currencies of Thailand's key trading partners under the new exchange rate regime using the cointegration technique. The major conclusions obtained from this empirical analysis may be broadly summarized as follows. First, the empirical evidence, based on the DF and ADF statistics, seems to suggest that the nominal exchange rates and relative prices are well characterized as non-stationary 1(1) process. Second, the cointegration analysis provides no evidence in support of a long-run equilibrium relationship between bilateral nominal exchange rates for the Thai baht vis-d-vis the currencies of Thailand's major trading partners and the correspdnding relative price ratios. This implies rejection of PPP for these countries. If this is the case, considerable care should competitiveness against Thailand's key trading partners, of shocks to the nominal exchange rate be taken in assessing the loner run implications for the real exchange rate, and thus.

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1. Introduction In the pursuit of economic policy, monetary authorities in many developing countries have given increasing attention to the use of the exchange rate as a means of achieving and maintaining external competitiveness or as an anchor for domestic prices. This is particularly relevant in the case of Thailand where exchange rate policy has been regarded as an important instrument for correcting external disequilibrium problems (Wibulswasdi, 1987, p. 40), particularly after the switching of the exchange rate regime from pegging the US dollar to an undisclosed basket of currencies in November 1984. It has been surmised that, under this new exchange rate regime, the nominal exchange rate is adjusted continuously in order tc maintain the real exchange rate close to its long-run equilibrium level as implied by the purchasing power parity (hereafter PPP) doctrine.' Although this new exchange rate regime has given the Thai monetary authorities more room to maneuver the exchange rate in response to developments prevailing at home and abroad, it still remains unclear whether such a continuous adjustment of the nominal exchange rate is reasonably consistent with a differential between domestic and foreign inflation rates as implied by a PPP doctrine. In view of this, an examination of the validity of the PPP hypothesis is important since it can serve as a useful guide for Thailand's policymakers in implementing exchange rate management .2Earlier empirical studies of the PPP hypothesis have been carried out mainly in the context of highly developed or advanced countries. The evidence obtained so far has been far from conclusive. Some recent empirical studies of PPP are unable to find evidence in support of a long-run relationship between the exchange rate and the ratio of price levels. For example, Corbae and Ouliaris (1988) use the cointegration approach to test for PPP between the United States and her three major trading partners. They find little evidence in favour of PPP after 1973. Taylor (1988) finds no evidence supporting the long-run relationship between the exchange rate and inflation differentials among five countries of interest, even with an allowance made for transaction costs and measurement errors. Mark (1990), employing a cointegration technique, is unable to find empirical evidence to support the presence of PPP between the United States and six industrial countries during the 1973-1988 period. Similar findings, also using the technique of cointegration, are reported in empirical studies of other countries. For instance, Karfakis and Moschos (1989) observed that there is little evidence in support of the presencee of long-run PPP between Greece and six of its major trading partners since the adoption of a

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
**

managed floating regime in 1975. Kim and Enders (1991) showed that there was little evidence in favour of the existence of long-run PPP between Korea and the Pacific Rim nations over the 1973 to 1987 period. Contrary to the findings cited above, some other empirical studies have found some evidence in favour of the long-run PPP hypothesis (i.e. Hakkio, 1984; Rush and Husted, 1985; Frankel, 1981; Huizinga, 1987; Abuaf and Jorion, 1990). On the other hand, some studies report mixed results regarding the validity of the PPP hypothesis (see, for example, Taylor and McMahon, 1988). Although the exchange rate has played an increasing role in macroeconomic management in Thailand, particularly since the mid-1980s, little attention has been paid to explicitly modelling the behaviour of the exchange rate between the US dollar and the Thai baht in recent studies of macroeconometric modelling for Thailand such as Nijathaworn and Arya (1987) and Deeithinant (1988). The exception in this regard is the study by Warr and Nidhiprabha (1989).Against this background it is interesting to see whether, and to what extent, PPP is applicable to the case of Thailand from 1984.M1i to 1992.M6 when the management of the Thai baht became more flexible.' The validity of PPP is tested within the context of the bilateral nominal exchange rate-price relationship between Thailand and its seven major trading partners: Japan, the USA, the UK, Germany, Hong Kong, Malaysia and Singapore. These countries are chosen on the ground that their currencies have been used in the present currency basket of Thailand. The econometric methodology used for this analysis is based on a cointegration approach developed by Engle and Granger (1987). The cointegration analysis is useful since the existence of long-run relationships among the economic variables postulated by PPP theory can be tested for. The plan of this study is an follows. Section II provides a brief discussion of the theoretical framework of exchange rate determination based on the PPP approach and of some earlier empirical studies based on PPP. This is followed by a brief discussion of the econometric methodology employed in testing for the PPP hypothesis over the said period. Section III discusses empirical results.

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* The author would like to thank Dr Anthony. J. Phipps and Dr Costas L Karfakis for their detailed and valuable comments on earlier versions or the paper. Thanks are also due to anonymous referees for helpful comments and suggestions and to Dr Ammara Sripa}•ak and Dr Pichit Patrawimolporn for supplying part of the data for use in this study. Financial support from the Bank of Thailand is gratefully acknowledged. The views presented here are those of the author and do not necessarily coincide with the Bank of Thailand. 1. In a case where the exchange rate follows PPP, the real exchange rate will remain constant. To understand this, the bilateral real exchange rate (RER) of the Thai baht against a currency of one of Thailand's major trading partners is expressed algebraically as: RER = EPf / P where E represents the bilateral nominal (e.g. Thai baht/US dollar) exchange rate; P denotes the consumer price index (CPI) in Thailand: and P is the CPI in the USA. It follows from the above equation that if PPP prevails, then an increase in Thailand's price levels relative to the price levels of its corresponding trading partner would be compensated for or reflected in a proportionate fall in E. Accordingly, the RER would not be altered. See Dornbusch (1987) for more discussion on this. 2. Under the new exchange rate regime, the baht-US dollar rate is the exchange rate which has been normally used by the monetary authorities as a basis for setting an appropriate level of the baht's external value against Thailand's six major remaining trading partners, namely Japan, the UK, Germany, Hong Kong, Malaysia and Singapore. The daily nominal exchange rate between the Thai baht and the US dollar appears to have been adjusted in response to three proximate factors, namely, (i) the movements of the exchange rates of major currencies in the international foreign exchange market; (ii) the patterns of selling and buying of foreign currencies in the domestic market; and (iii)

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
**

the prevailing conditions and likely outlook of Thailand's economy (Wibulswasdi, 1988). Since the adjustments based on (i) and (ii) have been generally regarded as short term in nature, their effects on the rate setting seem to be minimal. Nevertheless, adjustments in the exchange rate following developments in these two factors have to be pursued constantly in order to shield the domestic economy from the adverse effects of fluctuations in the exchange rates of major currencies in the international foreign exchange market. Adjustments in exchange rate based on (iii), on the other hand, have constantly been implemented with the view to addressing a deterioration in competitiveness and in external debt as well as to protecting the balance of payments. This latter adjustment in exchange rates appears to be of particular importance at times when certain shocks, i.e. monetary or real shocks, can be identified 3. The evolution of exchange rate arrangements in Thailand can be broadly divided into five distinct phases: (i) the pre par value system (until 1963); (ii) the par value system (19631978); (iii) the daily fixed system (1978-1981); (iv) the de facto fixed system (1981-1984); and (v) The basket of currency system (1984-present). Exchange rate regimes during the first four periods may be broadly characterized as fixed exchange rate systems. This is no longer the case in the fifth period during which the variability of the bilateral nominal exchange rates of the Thai baht vis-d-vis the currencies of Thailand's seven prime trading partners has increased and the official exchange rate policy is regarded as an adjustable multi-currency peg regime. More detailed information on this can be found in Sakornratanakul and Patrawimolporn (1992)

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II. The PPP Approach to Exchange Rate Determination: Theoretical Considerations and Methodological Issues IL1 Theoretical Considerations Several alternative theoretical approaches to the determination of the exchange rate have been put forward in the literature.' One such .an approach is based on the notion of PPP. Although this approach has on occasions been criticized as being inappropriate on theoretical and empirical grounds, it has remained in use as an important building block in macroeconometric models and as guidance in choosing an appropriate long-run exchange rate as reflected in the "monetary approach" to exchange rate determination. The theory of PPP asserts that the bilateral exchange rate between two countries is determined by their price ratio, measured by some form of aggregate price indices. This implies that prices of a similar consumption bundle between countries, when expressed in a common currency, should be equal in the absence of transaction costs and trade barriers. This theory emphasizes the law of one price by assuming that perfect commodity arbitrage acts as an error-correction mechanism (ECM) to force the home price of a consumption bundle in line with the foreign price of a corresponding consumption bundle (Corbae and Ouliaris, 1988). There are two main versions of the PPP approach to exchange rate determination: one is the absolute version and the other is the relative version.The absolute version of PPP theory states that the equilibrium exchange rate between two currencies equals the ratio of two price levels (domestic price index to foreign price index). The estimating model based on such a version may be empirically formulated as:

et = a0+ a1t + ult

(1)

where e, denotes the bilateral nominal spot exchange rate (the domestic currency price (baht) of a unit of foreign currency), and n, is the relative price level, defined as p, - p*, between Thailand and each of its seven major trading partners, where p, stands for the domestic price level, p* represents the foreign price level and ul, is the disturbance term. All the lower case letters denote logarithms of the variables concerned. Testing the validity of this version is equivalent to testing whether ao = 0, a, = 1 and ul, is white noise. In the relative version of PPP, on the other hand, it is asserted that the rate of change of the nominal exchange rate is determined by the inflation :ate differential between the two countries. Since inflation erodes a currency's purchasing power, a country with a higher inflation rate tends to have its currency depreciated relative to a country with a lower rate of inflation. The validity of this version can be empirically tested by testing whether a Z = 0 and a, = 1 in the following model:

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
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Δet = a2 + a3 Δt + u2t (2)

IN Econometric Methodology In testing for the presence of a long-run relationship between the exchange rate and the price ratio between the two countries such as those specified in Equations (1) and (2), several alternative testing methods have been used in the literature e.g. OLS, TSLQ and cointegration. Since a testing methodology based on the cointegration approach of Engle and Granger (1987) has been rapidly gaining in popularity in recent empirical studies of the PPP hypothesis, due to its appropriate treatment of endogeneity and non-stationarity problems, it would be desirable to'•apply this testing procedure in this study.' The main idea underlying this cointegration analysis is that two (or more) non-stationary 1(1) variables can be combined to form a stationary 1(0) variable even though each individual variable itself

4. for a detailed review of this see, for example,Mussa(1984);MacDonald and Tailor(1992) 5. It is worth noting that the issue concerning the appropriateness of using a cointegration technique in testing the PPP hypothesis has received increasing attention in recent empirical studies. As noted in the papers by several researchers such as Hakkio and Rush (1991), the application of the cointegration technique to test for the presence of long-run PPP relationships seems to be more appropriate in -the case where the total sample length is long enough to capture the fluctuations in the variables concerned. In their view, the extension of the number of observations by the use of higher frequency data appeared to be of little help in increasing the power of the cointegration test. Mark (1990) also notes that some caution should be exercised in the interpretation of the empirical results based on the relatively short period of modern experience with flexible exchange rates (16 years). He has surmised that the issue of committing a so-called "type I error" would become more relevant if the "true" long-run were longer than 16 years. Contrary to this view, Isard (1983) argued that the adjustment toward long-run PPP can be fulfilled within two to five years. A similar argument to this is made in Manzur (1990) who finds that adjustment to long-run PPP can have full effect in five years.

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is non-stationary. In the present context, although the two time series (e, and n) in equation (1) are individually non-stationary or 1(1), they may be cointegrated if there exists a nonzero constant (3 such that ul, = e,- P'7<, is a stationary or 1(0) process. Then, e, and n, are said to be cointegrated with a cointegrating parameter β. In order to test for cointegratiorn between e, and it,, the Engle and Granger (1987) twostep method is applied in this study. In the "first step", it is necessary to establish that e, and n, in Equations (1) and (2) are integrated of the same order, i.e. a unit root or I(1) process. Note that this requirement must be fulfilled before proceeding to the second step since cointegration is a test for equilibrium between non-stationary time series. Testing for the presence of a unit root employed here is based on the socalled Augmented Dicky-Fuller (ADF) test as suggested in Dickey and Fuller (1979, 1981). The ADF test can be implemented by estimating the following equation:

------------------------------------------------(3)

where x, stands for variables appearing in (1) (that is, e, and n) k is the number of lags chosen to ensure that the estimated estimated residuals, e„ are approximately white noise, C is a constant term and TT is a time trend. Notice that when k = 0, the statistic in (3) becomes known as the Dickey and Fuller (DF) test. The null hypothesis is Ho: x, is I(1) which is rejected in favour of 1(0) if a is found to be significantly negative. The test statistic is the usual t-ratio for the estimate of a. Since the distribution of the DF and ADF t-statistic associated with the coefficient a is~ asymptotical, the appropriate critical values for these statistics are tabulated in Fuller (1976, p. 373) and denoted as ti, tiµ and TT depending on whether a constant and/ or a constant and time trend are included in (3), respectively. After having established that e, and n,.are cointegrated of the same order, the "second step" in cointegration tests is to test whether the time series in question are cointegrated. This can proceed by first regressing e, on 7r„ using OLS, and then examining whether the

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
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estimated residuals obtained from Equations (1) and (2) are stationary, 1(0), process using the integration test statistics, DF and ADF test statistics; reported in Dickey and Fuller (1981). If the residual terms in Equations (1) and (2) are stationary, the cointegrating vector among these variables is said to exist, implying that there is a stable long -run relationship among these variables.

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This requires testing for HO: -y, = 0 in the regression:

------------------------------------------------------(4) where u, are the residuals from the cointegrating regression. The t-ratio statistics associated with the estimated residuals are then compared with those provided in Engle and Granger (1987) and Engle and Yoo (1987). The rejection of the null hypothesis of a unit root for the residuals from the cointegrating regression implies that e, and n, are cointegrated. The Cointegrating Regression Durbin-Watson (CIRDW) test statistic - the DW ratio in the OLS estimation of the 'cointegrating regression' of Equations (1) and (2) - is also employed as an alternative test for the existence of cointegration. IIL Empirical Tests of the PPP Hypothesis IIL1 Data and Integration Analysis In this sectior., the null hypothesis that there is a long-run equilibrium relationship between the exchange rate, e, and relative prices, n,, for Thailand and each of its seven major trading partners is tested against the alternative that there is no such relationship, using the econometric technique of cointegration discussed earlier. The estimation period is' from 1984.M11 to 1992.M6. The choice of sample period was dictated by the implementation of the new exchange rate regime in which the Thai baht was unpegged from the US dollar. The definitions and sources of data are provided in the Appendix. There are a number of issues that must be considered in conducting the PPP testing of Equations (1) and (2) as noted by many researchers such as Boughton (1988) and Layton and Stark (1990). In this study, the following two related issues are addressed: (i) a suitable trading partner; and (ii) an appropriate price index. With regard to a suitable trading partner set, the following seven countries are selected: Japan, the USA, the UK, Germany, Hong Kong, Malaysia, and Singapore. These countries are selected on the grounds that their currencies are accounted for in the present system of Thailand's currency basket. As for theselection of appropriate price measures, the following two alternative definitions of the price index are utilized: the consumer price index (CPI) and the wholesale price index (WPI). The choice of these price indices in this study is dictated by their popularity in the literature on empirical studies of the PPP hyporthesis.b Before proceeding to test whether the exchange rates are cointegrated with the price ratios, it is necessary first to test for the existence of unit roots in the stochastic processes of the exchange rates and price ratios. The results of these integration tests are reported in Table 1. As indicated Table 1 Unit Root Tests of Exchange Rates and Prices Variable USA e Level(s) rzw nc -1.73(0) [1833] -2.56(0) [17.40] -4.41(0) [18.90] -2.92(0) [1630] -3.40(0) [21.09] -3.34(1) -2.17(0) [12.68] -1.92(0) [18.80] -0.96(0) [10.62] -1_07(0) [11.45] -3.62(0) [17.69] -2.87(0) First Difference(s 471w -8.13(0) 7.43( [17.0 [19.15] [S.SO] -8.39(0) [6.40 [16.50] [10.9 -10.95(1) [13.6 [17.18] [13.9 -7.62(0) [11.1 (18.4-i] [8.09] -9.39(1) [16.1 [17.71] [19.7 -8.70(1) Ae

-3.18(2) (20.28] UK -2.61(0) [S.BSJ Japan -1.51(0) [20.51] Germany -1.44(0) [16.05] Singapore -2.28(1) [18.12] Malaysia -1.52(1)

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
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[18.6 [14JS] [11.0 6J number of lagged 9J Notes: Figures in round parentheses represent the dependent variables used in [18.38] [2035] [10.23]

the autoregression to ensure the white noise in residual terms. The selection between zero and nonzero lags was based on the Lagrange multiplier (LM) test for twelfth-order serial correlation of the residuals. Figures in square brackets refer to the values of the LM(12) statistic. The rest of the entries are the reported DF and ADF statistics (T,) The critical value at the 5% significant level is -3.45 for N = 100 (Fuller 1976, p. 373). Rejection of the null hypothesis that the series in question are /(1) requires r, <-3.45. The calculations of DF (ADF) statistics are base on Equation (3) in the text.

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by the DF (ADF) statistics, the null hypothesis of non-stationarity cannot be rejected for the `levels' of the variables. Using data in `first differences', by contrast, has resulted in the rejection of the null hypothesis of nonstationarity for all the series concerned, as the DF (ADF) statistics are now significantly negative. The results of this seem to suggest,that the exchange rates and most of the ratios of price levels are integrated of order one. The exceptions in this regard are the log level of 7tc (the price ratio expressed in terms of CPI) in the case of Thailand and Japan and the log levels of ntv (the price ratio in terms of WPI) in the case of Thailand and Singapore where the unit root null hypothesis can be rejected. This implies from the outset that there is no cointegration in these cases, and these country pairs are excluded from further cointegration tests.

6. Since data series on CPI and WPI for Hong Kong are not available from the IFS tape, testing for the existence of a cointegrating relationship between exchange rate and the relative price levels for this country is therefore left out in the subsequent empirical analysis. 7. The finding that PPP does not hold for Thailand during 1984-1992 seems to be inconsistent with the views contained in Akrasanee et al. (1991) and Wibulswasdi (1987) who claimed that the real exchange rate was from time to time depreciated as part of exchange ratemanagement by the Thai authorities in correcting external disequilibrium and in promoting export-led growth.

H1.2 Testing for Cointegration: Bilateral Exchange Rates of the Thai Baht and Relative Prices Since most of the data series of concern are integrated of order one, it is therefore legitimate to apply Engle and Granger's txvo-step estimation procedure for testing the existence of the cointegration relationship. The evidence from the DF (ADF) tests reported in Table 2 indicates that the Table 2 Cointegration Tests: Nominal Exchange Rates and Relative Prices ` Consumer Price Differential DF(ADF) CIRDW USA UK -1.43(0) (20.121 -2.69(0) (4.581 0.09 0.21 Wholesale Price Differential DF(ADF) CIRD W -2.83(4) 0.21 [15.28] -2.16(0) 0.09 [5.20]

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
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Japan Germany Singapore Malaysia

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-1.65(0) [16.83] 1.38(0) [13.61] -0.76(0) [20.92]

0.05 0.06 0.09

-1.93(0) (13.81) -2.01(0) 116.921 -2.27(0) (12.731

0.05 0.08 0.15

Notes: See notes to Table 1. The critical values of the DF (ADF) and CIRDW tests at the 5% level of significance are -3.37 (-3.17) and 0386 respectively for sample sizes in the vicinity of 100 (Engle and Granger, 1987). nominal bilateral exchange rates (between the Thai baht and the currencies of Thailand's key trading partners) are not cointegrated with the ratio of price differentials, when either nc or nw are used. As is evident from Table 2, the values of the DF or ADF test statistics (1statistics) are such that the null hypothesis of a unit root for the residuals from the cointegrating regression cannot be rejected in any case at the 5% significance level. A similar conclusion of no cointegration of the exchange rates and corresponding sponding price ratios is obtained from the CIRDW test statistics. The results of this appear to suggest that a simple notion of PPP did not hold between Thailand and its key trading partners during the period under review.' This implies that the nominal bilateral exchange rates for the Thai baht, vis-a-vis the currencies of Thailand's major trading partners, and the corresponding price ratios, drifted apart from each other following shocks to the balance of payments. That is, any variation in real exchange rates is regarded as being permanent and the real exchange rate is not expected to return to the equilibrium PPP value.Although the empirical results reported here seem to provide no support for cointegration, these results should be viewed as being preliminary and hence be interpreted with considerable caution. However, the results may be explained in the following ways. First, the failure of a simple PPP approach to model exchange rate determination may reflect the omission of some important variables as additional regressors from a model.' As noted by many researchers, a variety of factors, such as changes in monetary and/or fiscal policies, differential changes in productivity growth or terms of trade shock, may justify the departure of the exchange rate movements from PPP (see, inter alia, Frankel, 1981; Adler and Lehmann. 1983; Edison, 1987). Second, the results may be explained by the relatively short sampling period (approximately eight years) used in this study. Such a period may be too short to detect any significant movements of exchange rates to return to PPP following a shock to the economy. However, data over a longer sampling period with no switching of exchange rate regimes are not readily available. Extension of the data set backwards seems to be inappropriate, as the econometric technique used here cannot deal with changes in exchange rate regimes. As noted by many researchers, for example, Mussa (1984) and Mark (1990), the behaviour of real and nominal exchange rates has differed significantly across periods of fixed and flexible nominal exchange rate regimes and, in particular, the variance of the changes is much larger under floating exchange rates. Third, the unfavourable results of the PPP version of exchange rate determination may be attributed to the limited variability of the rate of inflation in Thailand during the period under. review. As claimed by many researchers (see, for example. Kim 1990), PPP is unlikely to hold when country pairs experience small differentials in price movements. Finally, from a technical point of view, the finding of no cointegration in PPP may be associated with the following two technical issues.' The first issue is related to the power of the Dickey-Fuller unit root test. As claimed by many researchers (see, inter alia, Schwert, 1987, Lo and MacKinlay, 1989), the power of the Dickey-Fuller unit root test is quite low in the sense that it tends to fail to reject the null hypothesis of a unit root against relevant trend stationarity alternatives, especially in the case of testing against the local alternative of a root close to, but below unity. In view of this, the non-rejection of the null hypothesis that the variables of interest are difference stationarity or I(1) may be due to two reasons. One reason is that the null is, in fact, true. The other is that, although the null is false. the data do not contain sufficient information to allow the test to statistically reject it. The second related issue is concerned with the formulation of an appropriate testing hypothesis in unit root tests. It has been claimed that the traditional formulation of the testing hypothesis in unit root tests is more favourable for the null hypothesis (see Kwiatkowski et al., 1992, among others). As can be seen, the rejection of the null hypothesis that the variables in question do not contain a unit root requires overwhelming evidence against it. It is

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
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possible that the conclusions obtained in this study would be different if the null and alternative hypotheses were to be reversed.9

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8. I think a referee of this journal for directing my attention to these issues. 9. For more detailed discuss a new approach to testing for a unit root, see Maddala(1992),among others

**Appendix: Definitions of Variables and Sources of Data
**

Data on exchange rate series (the baht price of foreign currencies) employed in this study are obtained from the Department of Economic Research, the Bank of Thailand (BOT). Data series on price indices - the consumer price index (CPI) and the wholesale price index (WPI) - are taken from the IMF's International Financial Statistics (IFS) tape, lines 63 and 64 respectively. Note that price indices appearing in line 64 represent some form of wholesale or producer price indices. All data series cover 1984.M11 to 1992.M6, except that of Malaysia's WPI which is available from 1986.M1 onwards. The variables used in this study are all measured monthly and defined empirically as follows: e The bilateral nominal spot exchange rate of the Thai "baht" against the currencies of Thailand's seven major trading partners, namely the US dollar, the Japanese yen, the UK pound stering, the deutschmark, the Hong Kong dollar, the Malaysian ringgit, and the Singapore dollar. All data are expressed in logarithms.

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
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An increase in the exchange rate depicts a nominal depreciation of the Thai baht rate. The data on exchange rates are monthly average values and are obtained from the BOT. pc The log of Thailand's consumer price index. pw log of Thailand's wholesale price index_ pcf The log of the consumer price index of Thailand's key trading partners, ners, respectively. Pwf The log of the wholesale price index of Thailand's key trading partners, respectively. ' c The log of the ratio of Thailand's CPI to the respective CPI of Thailand's major trading partners, defined as pc - pcf. w The log of the ratio of Thailand's WPI to the respective WPI of Thailand's major trading partners, defined as pw = pw~

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References Abuaf, N. and Jorion, P., 1990, Purchasing power parity in the lone-run. The Journal of Finance, XLV, pp. 157-174. Adler, M. and Lehman, B., 1983, Deviations from purchasing power paritv in the long run. The Journal of Finance, XXXVIII, pp. 1471-1487. Akrasanee, N., Jansen, K. and Pongpisanupichit, J., 1991, International Capital Flows and Economic Adjustment in Thailand. Thailand Development Research Institute, Bangkok. Boughton, J. M., 1988, The monetary approach to exchange rates: what now remains? Essay in International Finance, No. 171, October, Department of Economics, Princeton University. Corbae, P. D. and Ouliaris, S., 1988, Co-integration and tests of purchasing power parity Review of Economic and Statistics, 70, pp. S08-S11. Deeithinant, T., 1988, A Macroeconomic Model for the Thai Economy: with Special Emphasis on Some Current Issues. Ph.D. dissertation, submitted to the Washington University, St Louis, MO. Dickey, D. A. and Fuller, W. A., 1979, Distribution of the estimators for auto-regressive time series with a unit root. Journal of the American Statistical Association, 74, pp. 427431 Dickey, D. A. and Fuller, W. A., 1981, Likelihood ratio statistics for autoregressive time series with a unit root. Econontetrica, 49(4), pp. 1057-1072. Dornbusch, R, 1987, Purchasing power parity. In Eatwell, J., Milgage, M. and Newman, P., Eds., The New Palgrave: A Dictionary of Economics, vol. 3. Macmillan, London, pp1075-1085. Edison, H. J., 1987, Purchasing power parity in the long run: a test of the dollar/pound exchange rate (1890-1978). Journal of Money, Credit and Banking, 19, pp. 376-387. Engle, R. F. and Granger, C. W. J., 1987, Co-integration and error correction: representation, estimation, and testing. Econometrica, 55, pp. 251-276. Engle, R. F., and Yoo, S., 1987, Forecasting and testing in cointegrated systems. Journal of Econometrics, 35, pp. 143-159. Frankel, J. A., 1981, Flexible exchange rate, prices, and the role of news: lessons from the 1980s. Journal of Political Economy, 89, pp. 665-705. Fuller, W. A., 1976, Introduction to Statistical Time Series. John Wiley, New York. Hakkio, C. S., 1984, A re-examination of purchasing power parity. Journal of International Economics, 17, pp. 265-277. Hakkio, C. S., and Rush, M., 1991, Co-integration: how short is the long run?. Journal of International Money and Finance, 10, pp. 571-581. Hataiseree, R. and Supapongse, M., 1991, Monetary Policy in Thailand: An Update. Paper presented at the SEACEN-IMF Seminar, 17-19 December, 1990, Kuala Lumpur.

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**Co-integration Tests of Purchasing Power Parity: the Case of the Thai Baht
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