Testing the purchasing power parity hypothesis: Case of ASEAN economies

Bekő, Jani; Boršič, Darja Article Testing the purchasing power parity hypothesis: Case of ASEAN economies Naše gospodarstvo / Our Economy Provided in Cooperation with: Faculty of Economics and Business, University of Maribor Suggested Citation: Bekő, Jani; Boršič, Darja (2018) : Testing the purchasing power parity hypothesis: Case of ASEAN economies, Naše gospodarstvo / Our Economy, ISSN 2385-8052, De Gruyter Open, Warsaw, Vol. 64, Iss. 4, pp. 74-85, https://doi.org/10.2478/ngoe-2018-0024 This Version is available at: https://hdl.handle.net/10419/206271 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0 74 NAŠE GOSPODARSTVO OUR ECONOMY pp. 74–85 ORIGINAL SCIENTIFIC PAPER Citation: Bekő, J., & Boršič, D. (2018). Testing the Purchasing Power Parity Hypothesis: Case of ASEAN Economies. Naše Gospodarstvo/Our Economy, 64(4), 74-85. DOI: 10.2478/ngoe-2018-0024 DOI: 10.2478/ngoe-2018-0024 UDK: 336.741.233 JEL: C33, F31, P22 RECEIVED: NOVEMBER 2018 REVISED: NOVEMBER 2018 ACCEPTED: NOVEMBER 2018 Vol. 64 No. 4 2018 Testing the Purchasing Power Parity Hypothesis: Case of ASEAN Economies Jani Bekő University of Maribor, Faculty of Economics and Business, Slovenia [email protected] Darja Boršič University of Maribor, Faculty of Economics and Business, Slovenia [email protected] Abstract We examine the purchasing power parity (PPP) hypothesis of 10members of ASEAN. A battery of panel unit root tests is employed on data series from January 1995 to January 2018 in order to search for validity of PPP in the period before the Great Recession and in the post-crisis period. All the calculations are based on four numeraire currencies: Chinese yuan (CNY), Japanese yen (JPY), US dollar (USD), and the euro (EUR). First, following the outcome of the present study for ASEAN countries, the PPP holds mostly with respect to CNY rates. Second, for the post-financial crisis period, our research proves conclusively that the PPP supposition is predominantly valid between the currencies of ASEAN countries and EUR rates. The sample of countries in the study is limited to the ASEAN group of economies. Based on the evaluated parity conditions, the emergence of global economic crisis brought about significant currency shifts in the ASEAN. The selection and testing of a broader range of numeraire currencies is vital to provide empirical underpinning for PPP notion. Keywords: purchasing power parity, panel unit root tests, ASEAN countries, currency markets Introduction The concept of purchasing power parity (PPP) encapsulates the basic idea of competitive open markets and represents an essential part of international macroeconomics. The relative version of PPP implies that variations in the exchange rates correspond to the changes in the ratio of price levels of the observed countries. Shifts in relative prices are, therefore, in the long run, the main driving force behind the development of exchange rates. Due to numerous market frictions, obstacles in cross-border trade, and nonlinearities in the adjustment of exchange rates, deviations from PPP can be substantial (Taylor & Taylor, 2004). Although the empirical literature on PPP for developed market economies is enormous and is continuing to expand with the introduction of new methodological approaches and estimation techniques, the interest of experts is progressively turning toward the emerging Asian economies. Their growing importance in international trade and in global supply chains as well as their increasing participation in international financial flows makes Asian countries particularly interesting candidates for PPP testing. 75 Our paper scrutinizes the PPP hypothesis on the members of the Association of Southeast Asian Nations (ASEAN): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The economic footprint of the ASEAN camp is important also on a global scale. When taken as a single economy, ASEAN’s GDP is the fifth largest in the world, and it has the third largest population. Especially in terms of trade and foreign direct investment inflows, the group cultivates firm ties with EU, China, Japan, and the USA (Feng, 2018). The novelty of this paper is twofold. First, we use a battery of panel unit root tests on extended data series from January 1995 to January 2018 in order to search for validity of PPP in the period before the Great Recession and in the post-crisis period. Second, we run the unit root tests concurrently for Chinese yuan (CNY), Japanese yen (JPY), US dollar (USD), and euro (EUR) rates. The paper is organized as follows. The next chapter offers a short overview of the literature, while the basic theory of PPP, the data, and the econometric methodology are described in the following chapter. Thereafter, the empirical results are discussed. The main findings of our work are delineated in the concluding part of the paper. Concise Review of Literature The study of Bec and Zeng (2013) operates with data set covering the early years of the Association of Southeast Asian Nations. The researchers examine real exchange rates of five charter members of the Association (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) over the period from 1970–2010. Estimating nonlinear models, they reject the null of a unit root for all the five exchange rates with respect to the USD and thus confirm the nonlinear mean-reverting supposition for the group of ASEAN-5. The stationarity of real exchange rates on the USD is also proven in seven out of eight Asian economies in the paper of Zhou and Kutan (2011). Further, Arize et al. (2015) inspected the cointegration characteristics of exchange rates and prices of 27 Asian economies against the USD and found support for PPP in a significant number of countries. Lau et al. (2012) also confirmed PPP in the period from 1997–2009 for four ASEAN countries when China is used as a base country. Findings on the PPP in Lau et al. (2012) at least indirectly point to the importance of cooperation in trade and finance and economic policy coordination among economies in the Asian region. The remaining studies on our list provide more mixed evidence on PPP or at least some reservations about the empirical validity of this exchange rate concept. Chang et al. (2010) rejected the unit root hypothesis for merely four countries’ real exchange rates among eight ASEAN members only after the panel’s seemingly unrelated regression of the Kapetanios–Shin–Snell (SURKSS) tests are applied with respect to the USD and the JPY. Based on nonlinear unit root tests employing the USD as the numeraire, Chang et al. (2012) also reported that PPP is relevant only for three among eight of the ASEAN economies. The PPP proposition has been carefully examined by Munir and Kok (2015) as well, namely, for the class of ASEAN-5 with a wide range of advanced panel unit root tests and cointegration analysis. The evidence on stationarity attributes of real exchange rates toward the USD is, in this study, fragmentary; thus, considerably more support for the theory is reported from the application of panel cointegration test. According to Munir and Kok (2015), an important piece of empirical evidence on PPP could be obtained by elaborating on the different numeraire currencies in future studies. Additionally, we emphasize the work of Choji and Sek (2017) who analysed five ASEAN members via threshold cointegration tests but detected long-run PPP in only two cases. Recently, Dang and Yang (2017) tested the law of one price on the sample of local retail prices for 78 goods and services in ASEAN-8 countries. The main conclusion from the quoted study is that, under the nonlinear ESTAR regime, in the period from 1990–2013, the convergence to the law of one price can be observed only in approximately 20%–23% of the analysed traded and nontraded prices. Methodology and Data Froot and Rogoff (1995) have formally stated the purchasing power parity (PPP) as et = α0 + α1pt + α2 pt* + ξt , (1) where et stands for the nominal exchange rates defined as the price of foreign currency in the units of domestic currency, pt presents domestic price index, and pt* foreign price index. The error term ξt indicates deviations from PPP. All the variables are expressed in logarithms. The empirical investigation is based on monthly data spanning from January 1995 to January 2018 for ASEAN economies, including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The consumer price indices (CPI, 2010=100) and the monthly averages of nominal exchange rates with reference currencies of EUR and USD were assembled from IMF (2018). For the purpose of this empirical investigation, exchange rates of CNY and JPY were calculated as cross rates among the USD rates of observed ASEAN economies and USD rates of CNY and JPY, respectively. Due to the Jani Bekő, Darja Boršič: Testing the Purchasing Power Parity Hypothesis: Case of ASEAN Economies 76 NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 64 No. 4 / December 2018 limited availability of CPI data for Euroarea, the analysis of EUR reference rates starts in January 1996. The empirical study was conducted in three parts, considering the whole observed period: (1) the pre-economic crisis period; (2) spanning from January 1995 to December 2007; and the post-economic crisis period; (3) ranging from July 2009 to January 2018. NBER (2012) methodology for defining the US business cycles was applied in determination of the subperiods. In this paper, we estimate the peculiarities of real exchange rates in accordance to the strict version of PPP in Equation 1, where α0=0, α1=1, and α2= -1. The nominal exchange rates should adjust in such a way to eliminate the changes in relative prices. Therefore, the real exchange rates should be constant over the long-run, and their time series are expected to be stationary, with no unit roots (Parikh & Wakerley, 2000). In search for evidence in favour of PPP, this paper applies panel unit root tests. As described in Boršič and Bekő (2018), the model takes into account the following autoregressive [AR(1)] process for panel data: t,iit,i1t,iit,i Xyy εδρ ++= − , (2) where i represents N cross-section units observed over periods t=1, 2, ..., Ti, Xi,t are exogenous variables in the model (any fixed effects or individual trends), ρi are autoregressive coefficients, while errors (εi,t) are assumed as mutually independent idiosyncratic disturbance. When the absolute value of ρi is less than 1, yi is weakly stationary. When the absolute value of ρi is 1, yi contains a unit root. The panel unit root tests in our analysis differ in two assumptions about the ρi in panel unit root tests. Levin, Lin, and Chu (2002) and Breitung (2000) approaches consider common unit root processes, with common autoregressive coefficients across cross-sections (ρi=ρ) for all i. On the other hand, Im, Pesaran, and Shin (2003), Fisher ADF and Fisher PP (Maddala & Wu, 1999; Choi, 2001) procedures deal with individual unit root processes, where ρi varies across cross-sections. According to Boršič and Bekő (2018), the precending subchapters denote the specific characteristics of panel unit tests applied in this study. Characteristics of Levin, Lin, and Chu test and Breitung test The Levin, Lin, and Chu (2002) test takes into account the following augmented Dickey–Fuller (ADF) specification ∑ = −− ++∆+=∆ i p j titijtijititi Xyyy 1 ,,,,1,, ' εδβα , (3) where a common α = ρ-1 is assumed, while the lag order for difference terms (pi) varies across cross-sections. The null hypothesis (H0: α = 0) implies that there is a unit root. While the alternative hypothesis (H1: α < 0) implies stationarity. In the Levin, Lin, and Chu (2002) approach, the first step requires an assessment of auxiliary regressions of Δyi,t and yi,t on lagged terms Δyi,t-j and on exogenous variables Xi,t. Residuals (denoted by ~) are used as proxies for Δyi,t and yi,t. In the next step, an estimate of α ( α ˆ ) is calculated from the pooled equation tititi yy ,1,, ~~ ηα +=∆ − , (4) where ƞi,t denotes the error process. Levin, Lin, and Chu (2002) derive the modified t statistics [t* in Eq. (5)] for the resulting α ˆ and show that it is asymptotically normally distributed: , (5) where μ * and σ * are adjustment terms for the mean and standard deviation calculated by Levin, Lin, and Chu (2002), α σ ˆ is the standard error of α ˆ , 2 ˆ σ is the estimated variance of the residuals from Eq. (4), and N S ˆ denotes the average of individual ratios of long- to short-run standard deviations. N S ˆ is estimated with kernel-based techniques. In accordance with Levin, Lin, and Chu (2002) and Hurlin (2010), we applied the Bartlett kernel, Parzen kernel, and quadratic spectral kernel. In order to check the robustness of the results, we also considered the regression in Eq. (3) augmented with individual linear deterministic trends. The number of lags in each cross-section ADF regression (pi) was selected by the Schwarz information criterion. The Breitung test is similar to the Lin, Levin, and Chu test. It estimates auxiliary regressions of Δyi,t and yi,t on lagged terms Δyi,t-j only, while proxies are transformed and detrended (Δyi,t*). Panel proxy equation is used to estimate the persistence parameter α: Δyi,t*= α yi,t-1*+vi,t. (6) According to Breitung (2000), under the null hypothesis, the estimate of the persistence parameter α is asymptotically normally distributed. Characteristics of Im, Pesaran, and Shin test Im, Pesaran, and Shin (2003) take into account individual unit root processes and calculate individual ADF regression for each cross-section: ∑ = −− ++∆+=∆ i p j titijtijititi Xyyy 1 ,,,,1,, ' εδβα , (7) 77 where the null hypothesis is iallfor,0: 0 = i H α for all i, (8) while the alternative hypothesis is defined as , (9) t stands for the average of the t-statistics for αi from individual ADF regressions: ∑ = = N i i t N t 1 1 . (10) Im, Pesaran, Shin (2003) standardize the t -statistic and prove that the new statistic W is asymptotically normally distributed. Characteristics of Fisher ADF and Fisher PP Tests Considering the results of Fischer (1932), Maddala and Wu (1999) and Choi (2001) developed tests that integrate the individual p-values. πi denotes the p-value from individual unit root test for cross-section i. According to Hurlin (2010), the corresponding p-values are uniform [0, 1] variables. Maddala and Wu (1999) define their statistic as ∑ = −= N i i 1 2)log(2 πχ (11) and prove that it has an asymptotic χ2-distribution with 2N degrees of freedom. Choi (2001) defines a similar Z statistic: N N Z N i i+ −= ∑ =1 )log( π . (12) The null and alternative hypotheses are the same as for the Im, Pesaran, and Shin test above [Eqs. (8) and (9)]. Under the null hypothesis, Z-statistic is normally distributed. Presentation of Results Results of the Levin, Lin, and Chu panel unit root test are presented in Table 1. For the whole period under investigation (January 1995–January 2018), the null of a unit root is strictly rejected in all variations of the test for CNY and EUR as base currencies, while it is rejected for USD base currency when individual effects and individual linear trends are included regardless of kernel specification. As for JPY base currency, the null is rejected only in one out of six variations of the test. Applying these empirical results to PPP theory, we can conclude that, for the whole observed period, there is very strong evidence for validity of PPP in the case of CNY and EUR, quite strong evidence in the case of USD, and very little evidence in the case of JPY as a reference currency. The precrisis period (January 1995–December 2007) provides less evidence for the validity of PPP because the unit root is rejected only when individual effects are considered with a 10% level of significance for the CNY as reference currency. In the case of EUR, the null is rejected more firmly with a 1% significance level when individual effects are allowed for, while the unit root is not rejected for USD and JPY base currency in any variation of the Levin, Lin, and Chu test. Consequently, the PPP is proven for CNY and EUR as base currencies. Regarding the post-crisis period (July 2009–January 2018), the null of a unit root is rejected strongly (1% significance level) for USD base currency in all variations of the test, while it is also strongly rejected when individual effects are considered for all kernel-based techniques in the case of EUR as base currency. However, the unit root is not rejected, and PPP not proven in the case of CNY and JPY as reference currencies. Thus, the PPP theory is confirmed in the case of USD and EUR as reference currencies. Table 1. Results of Levin, Lin, and Chu Test Sample Base currency Bartlett Kernel Parzen Kernel Quadratic Spectral Kernel Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends t* (p-value) t* (p-value) t* (p-value) t* (p-value) t* (p-value) t* (p-value) 1995M1-2018M1 CNY -2.84467*** (0.0022) -3.62520*** (0.0001) -2.75534*** (0.0029) -3.39716*** (0.0003) -2.71046*** (0.0034) -3.29122*** (0.0005) JPY 0.20157 (0.5799) -1.34766* (0.0889) 0.35966 (0.6404) -1.03958 (0.1493) 0.30566 (0.6201) -1.07637 (0.1409) USD -0.03777 (0.4849) -2.75271*** (0.0030) 0.02757 (0.5110) -2.61838*** (0.0044) 0.00323 (0.5013) -2.64823*** (0.0040) EUR -2.19054** (0.0142) -1.81003** (0.0351) -2.15267** (0.0157) -1.77429** (0.0380) -2.19212** (0.0142) -1.76768** (0.0386) Jani Bekő, Darja Boršič: Testing the Purchasing Power Parity Hypothesis: Case of ASEAN Economies 78 NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 64 No. 4 / December 2018 Table 2 displays results of the Breitung panel unit root test. It can be observed that the null of a unit root is firmly rejected in the case of JPY and CNY as base currencies in the whole observed period for all alternative specifications, while the null cannot be rejected for USD and EUR reference currencies. When the presence of the Great Recession is taken into consideration, the null cannot be rejected for either the reference currencies or for time-period specifications. Along with results of the Breitung test, PPP can be confirmed only for the whole period when JPY and CNY are applied as base currencies. Results of the Im, Pesaran, and Shin test are introduced in Table 3. For the whole observed period, the null of a unit root can be strongly rejected in the case of CNY reference currency for all test specifications. If JPY is considered, the null is rejected with 10% significance level when individual effects and individual linear trends are included and lag selection is determined by Schwarz and Hannan–Quinn information criteria, while the null cannot be rejected in the case of EUR and USD reference currencies. Thus, there is strong evidence for validity of PPP in the case of CNY and 1995M1-2007M12 CNY 1.59711* (0.0551 -1.02347 (0.1530) -1.57767* (0.0573) -1.20267 (0.1146) -1.58037* (0.0570) -1.15362 (0.1243) JPY 0.36711 (0.6432) 1.69213 (0.9547) 0.35278 (0.379) 1.72024 (0.9573) 0.33934 (0.6328) 1.69327 (0.9548) USD -0.68964 (0.2452) 3.61977 (0.9999) -0.66254 (0.2538) 3.57239 (0.9998) -0.67525 (0.2498) 3.61217 (0.9998) EUR -2.84479*** (0.0022) -1.27696 (0.1008) -2.76144*** (0.0029) -1.08868 (0.1381) -2.78141*** (0.0027) -1.09787 (0.1361) 2009M7-2018M1 CNY -0.34785 (0.3640) -1.05809 (0.1450) -0.22398 (0.4114) -0.75396 (0.2254) -0.18528 (0.4265) -0.56833 (0.2849) JPY -0.34558 (0.3648) 1.45723 (0.9275) -0.23131 (0.4085) 1.69499 (0.9550) -0.25693 (0.3986) 1.61862 (0.9472) USD -2.73269*** (0.0031) -3.11251*** (0.0009) -2.65208*** (0.0040) -2.98523*** (0.0014) -2.69401*** (0.0035) -2.90644*** (0.0018) EUR -3.44511*** (0.0003) 0.69641 (0.7569) -3.29210*** (0.0005) 0.98820 (0.8385) -3.30661*** (0.0005) 1.05484 (0.8543) Notes: (1) The number of lags used in each cross-section ADF regression (pi) was defined by the Schwarz information criterion. Computation was conducted with Newey–West bandwidth selection. (2) *** denotes the significance level of 1%, ** significance level of 5% and * significance level of 10%. (3) The whole period and the precrisis period for EUR reference rates starts with January 1996. Table 2. Results of Breitung Test Sample Base currency Akaike Information Criterion Schwarz Information Criterion Hannan–Quinn Information Criterion Individual effects and individual linear trends Individual effects and individual linear trends Individual effects and individual linear trends t-stat (p-value) t-stat (p-value) t-stat (p-value) 1995M1-2018M1 CNY -1.59019* (0.0559) -2.15920** (0.0154) -1.73752** (0.0411) JPY -3.65533*** (0.0001) -4.08082*** (0.0000) -4.08082*** (0.0000) USD 0.37221 (0.6451) -0.13866 (0.4449) 0.02514 (0.5100) EUR -0.51106 (0.3047) -0.31344 (0.3770) -0.34121 (0.3665) 1995M1-2007M12 CNY 0.41781 (0.6620) -0.10945 (0.4564) -0.04845 (0.4807) JPY -0.73655 (0.2307) -1.15655 (0.1237) -1.35898* (0.0871) USD 1.45084 (0.9266) 1.77285 (0.9619) 1.77285 (0.9619) EUR -0.69291 (0.2442) -0.25792 (0.3982) -0.26064 (0.3972) Table 1. Results of Levin, Lin, and Chu Test – continuation 79 some evidence in favour of PPP in the case of JPY as base currency. For the precrisis period, the results show the rejection of the null for CNY as reference currency when individual effects are included for all three lag selection criteria. The null can also be rejected when EUR is taken into account in the case of lag selection by Akaike information criteria regardless for both deterministic specifications, while for JPY and USD the null of a unit root cannot be rejected. Consequently, these results show evidence for the validity of PPP in the case of CNY and EUR as reference currencies. As for the post-crisis period, one cannot reject the unit root when CNY, JPY, and USD are considered as reference currencies regardless of test specification. In the case of EUR rates, the null can be rejected when individual effects are included in the specification with all three lag selection criteria. Hence, there is evidence for validity of PPP when EUR is the reference currency. Maddala and Wu χ2 statistics, as the results of Fisher ADF panel unit root tests, are stated in Table 4. Considering the whole time period, the null of a unit root cannot be rejected for JPY and USD no matter what the specification of the test is, while the unit root is strongly rejected (1% significance level) in the case of CNY and rejected by 5% and 10% significance level in the case of EUR. Along with these results, one can confirm the validity of PPP in the 2009M7-2018M1 CNY -0.20769 (0.4177) -0.18410 (0.4270) -0.25420 (0.3997) JPY -1.24490 (0.1066) -0.76801 (0.2212) -0.94437 (0.1725) USD 1.28435 (0.9005) 1.38266 (0.9166) 1.33883 (0.9097) EUR 0.41605 (0.6613) 0.87160 (0.8083) 0.73559 (0.7690) Notes: (1) *** denotes the significance level of 1%, ** significance level of 5% and * significance level of 10%. (2) The whole period and the precrisis period for EUR reference rates starts with January 1996. Table 3. Results of Im, Pesaran, and Shin Test Sample Base currency Schwarz Information Criterion Akaike Information Criterion Hannan–Quinn Information Criterion Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends W-stat (p-value) W-stat (p-value) W-stat (p-value) W-stat (p-value) W-stat (p-value) W-stat (p-value) 1995M1-2018M1 CNY -3.32945*** (0.0004) -2.99199*** (0.0014) -3.19978*** (0.0007) -2.97777*** (0.0015) -3.11683*** (0.0009) -2.94016*** (0.0016) JPY 0.06908 (0.5275) -1.44953* (0.0736) 0.48948 (0.6877) -1.25101 (0.1055) 0.20671 (0.5819) -1.44953* (0.0736) USD 0.31929 (0.6252) 0.57846 (0.7185) 0.41518 (0.6610) -0.20441 (0.4190) 0.40498 (0.6573) 0.45398 (0.6751) EUR -1.21038 (0.1131) -0.14190 (0.4439) -1.11461 (0.1325) -1.08613 (0.1387) -1.21038 (0.1131) -0.73303 (0.2318) 1995M1-2007M12 CNY -2.28701** (0.0111) 0.27314 (0.6076) -2.81715*** (0.0024) -053008 (0.2980) -2.27783** (0.0114) 0.40716 (0.6581) JPY 0.20472 (0.5811) 1.65316 (0.9509) -0.38098 (0.3516) 0.40852 (0.6586) -0.34869 (0.3637) 1.02405 (0.8471) USD -0.14988 (0.4404) 4.86334 (1.0000) -0.81643 (0.2071) 4.53882 (1.0000) -0.13955 (0.4445) 4.86334 (1.0000) EUR -0.96414 (0.1682) -0.50872 (0.3055) -1.44758* (0.0739) -1.32083* (0.0933) -0.96141 (0.1682) -0.50537 (0.3066) Jani Bekő, Darja Boršič: Testing the Purchasing Power Parity Hypothesis: Case of ASEAN Economies Table 2. Results of Breitung Test – continuation 80 NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 64 No. 4 / December 2018 whole period when CNY and EUR are considered as reference currencies. The evidence for PPP is similar, yet less strong, when the precrisis period is examined. There is no affirmation of PPP in the case of JPY and USD, while PPP can be confirmed when CNY and EUR are base currencies. The null is rejected when individual effects are considered for all three lag selection criteria in the case of CNY. The evidence for PPP is not as strong in the case of EUR, when the null can be rejected only when individual effects are included and Akaike information criterion is used for lag selection. Dealing with the post-crisis period results demonstrate that the null cannot be rejected in the case of CNY, JPY, and USD 2009M7-2018M1 CNY 0.01376 (0.5055) -1.19389 (0.1163) 0.26061 (0.6028) -1.08572 (0.1388) 0.11609 (0.5462) -1.06584 (0.1432) JPY 0.08081 (0.5322) 1.59587 (0.9447) 0.12700 (0.5505) 0.80247 (0.7889) -0.10073 (0.4599) 0.80247 (0.7889) USD -0.58358 (0.2798) -0.45074 (0.3261) -0.71958 (0.2359) 0.25144 (0.5993) -0.59358 (0.2764) -0.18332 (0.4273) EUR -2.42068*** (0.0077) 0.22655 (0.5896) -2.68312*** (0.0036) -0.78884 (0.2151) -2.54072*** (0.0055) -0.19460 (0.4229) Notes: (1) *** denotes the significance level of 1%, ** significance level of 5% and * significance level of 10%. (2) The whole period and the precrisis period for EUR reference rates starts with January 1996. Table 4. Results of Fisher ADF Tests (Maddala and Wu χ2 Statistic) Sample Base currency Schwarz information criterion Akaike information criterion Hannan–Quinn information criterion Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends χ2 (p-value) χ2 (p-value) χ2 (p-value) χ2 (p-value) χ2 (p-value) χ2 (p-value) 1995M1-2018M1 CNY 47.8525*** (0.0004) 40.2466*** (0.0046) 45.9678*** (0.0008) 39.3257*** (0.0061) 46.2142*** (0.0008) 39.5045*** (0.0058) JPY 16.4218 (0.6901) 26.3424 (0.1548) 15.5364 (0.7449) 23.6678 (0.2572) 16.1829 (0.7052) 26.3424 (0.1548) USD 18.0275 (0.5856) 13.9025 (0.8354) 16.9385 (0.6570) 18.0340 (0.5852) 18.7442 (0.5385) 15.0365 (0.7743) EUR 28.9691* (0.0884) 21.0815 (0.3923) 28.8146* (0.0915) 35.9699** (0.0155) 28.9691* (0.0884) 31.2629* (0.0518) 1995M1-2007M12 CNY 34.5334** (0.0227) 13.7195 (0.8444) 41.9868*** (0.0028) 21.5022 (0.3681) 34.4452** (0.0233) 13.6889 (0.8459) JPY 14.0657 (0.8272) 8.15253 (0.9908) 17.9265 (0.5923) 16.1911 (0.7047) 17.6815 (0.6084) 10.3226 (0.9619) USD 18.2235 (0.5727) 4.72183 (0.9998) 22.8137 (0.2980) 5.95651 (0.9990) 18.1499 (0.5775) 4.72183 (0.9998) EUR 27.3593 (0.1255) 21.0813 (0.3924) 34.0973** (0.0255) 27.2264 (0.1290) 27.3593 (0.1255) 21.0047 (0.3969) 2009M7-2018M1 CNY 24.1550 (0.2357) 22.6554 (0.3060) 22.7721 (0.3001) 22.8452 (0.2965) 25.2461 (0.1922) 23.8583 (0.2486) JPY 11.1853 (0.9413) 19.9705 (0.4598) 12.4129 (0.9011) 23.9718 (0.2436) 11.1853 (0.9413) 20.5449 (0.4243) USD 20.8592 (0.4055) 20.0991 (0.4517) 21.9432 (0.3436) 15.3765 (0.7545) 20.8950 (0.4033) 18.6685 (0.5435) EUR 35.1598** (0.0193) 14.8457 (0.7852) 37.5138** (0.0101) 22.1255 (0.3337) 36.2600** (0.0143) 17.6592 (0.6098) Notes: (1) *** denotes the significance level of 1%, ** significance level of 5% and * significance level of 10%. (2) The whole period and the precrisis period for EUR reference rates starts with January 1996. Table 3. Results of Im, Pesaran, and Shin Test – continuation 81 as reference currencies, showing no support for PPP theory. However, the null can be rejected when EUR is considered as reference currency and individual effects are included for all three lag selection criteria. Choi Z statistics resulting from Fisher ADF panel unit root test is presented in Table 5. In the whole period, there is again strong rejection of the unit root when CNY is the base currency. If individual effects and individual linear trends are included and either Schwarz or Hannan–Quinn lag selection criterion is applied the null can be rejected also in the case of JPY. While the unit root cannot be rejected in the case of USD and EUR. Thus, there is strong evidence for PPP in the case of CNY and some evidence for PPP in the case of JPY. For the precrisis period, the results are practically the same as in the case of Maddala and Wu χ2 statistics (Table 4). The results support the PPP theory in the case of CNY when individual effects are included, regardless of lag selection criterion and in the case of EUR rates when individual effects are included and Akaike information criterion is applied. As for the post-crisis period, the null cannot be rejected when JPY and USD are reference currencies, providing no support for PPP. The unit root can be rejected at a 10% significance level if CNY is the reference currency when Schwarz information criterion defines the lag with individual effects and Hannan–Quinn information criterion defines the lag regardless of deterministic specification. While in the case of EUR, the null can be rejected when individual effects are included, regardless of lag selection Table 5. Results of Fisher ADF Tests (Choi Z-Statistic) Sample Reference currency Schwarz Information Criterion Akaike Information Criterion Hannan–Quinn Information Criterion Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends Individual effects Individual effects and individual linear trends Z (p-value) Z (p-value) Z (p-value) Z (p-value) Z (p-value) Z (p-value) 1995M1-2018M1 CNY -3.47810*** (0.0003) -3.08320*** (0.0010) -3.29225*** (0.0005) -3.01163*** (0.0013) -3.20748*** (0.0007) -2.97789*** (0.0015) JPY 0.15187 (0.5604) -1.51149* (0.0653) 0.58926 (0.7222) -1.19860 (0.1153) 0.28753 (0.6131) -1.51149* (0.0653) USD 0.32240 (0.6264) 064219 (0.7396) 0.54587 (0.7074) -0.01755 (0.4930) 0.42446 (0.6644) 0.56074 (0.7125) EUR -1.17573 (0.1199) -0.05621 (0.4776) -1.00647 (0.1571) -0.80504 (0.2104) -1.17573 (0.1199) -0.54456 (0.2930) 1995M1-2007M12 CNY -2.42300*** (0.0077) 0.29064 (0.6143) -2.91573*** (0.0018) -0.42342 (0.3360) -2.41405*** (0.0079) 0.42343 (0.6640) JPY 0.28270 (0.6113) 1.74641 (0.9596) -0.29206 (0.3851) 0.59682 (0.7247) -0.31085 (0.3780) 1.09831 (0.8640) USD -0.14421 (0.4427) 4.68820 (1.0000) -0.81917 (0.2063) 4.55611 (1.0000) -0.13207 (0.4475) 4.68820 (1.0000) EUR -0.95286 (0.1703) -0.49809 (0.3092) -1.39073* (0.0822) -1.22500 (0.1103) -0.95285 (0.1703) -0.48724 (0.3130) 2009M7-2018M1 CNY -1.27747* (0.1007) -1.09983 (0.1357) -1.09093 (0.1377) -1.15650 (0.1237) -1.39959** (0.0808) -1.33317* (0.0912) JPY 1.02932 (0.8483) -0.43337 (0.3324) 0.80733 (0.7903) -1.09548 (0.1367) 1.02932 (0.8483) -0.56753 (0.2852) USD -0.52297 (0.3005) -0.45599 (0.3242) -0.60951 (0.2711) 0.34336 (0.6343) -0.50040 (0.3084) -0.17718 (0.4297) EUR -2.48687*** (0.0064) 0.23943 (0.5946) -2.70204*** (0.0034) -0.65594 (0.2559) -2.61343*** (0.0045) -0.17040 (0.4323) Notes: (1) *** denotes the significance level of 1%, ** significance level of 5% and * significance level of 10%. (2) The whole period and the precrisis period for EUR reference rates starts with January 1996. Jani Bekő, Darja Boršič: Testing the Purchasing Power Parity Hypothesis: Case of ASEAN Economies