The Linkage between Long-Run Purchasing Power Parity and CEPT scheme in ASEAN4 before and after Global Financial Crisis

Abstract

This paper examines the validity of purchasing power parity (PPP) hypothesis for four founding members of the Association of Southeast Asian Nations (ASEAN4) with Singapore as base currency. A range of standard unit root tests and cointegration used in previous studies was applied to test long run PPP and four models were introduced based on the implementation of Common Effective Preferential Trade (CEPT) scheme and the impact of global financial crisis. The result from the unit root test has shown that all the data are stationary at I (1). There was no evidence of PPP detected between ASEAN4 and Singapore before the implementation of CEPT scheme using Johansen cointegration test in model 1.However, the evidence of long-run PPP were detected between Malaysia-Singapore, Thailand-Singapore and Philippines-Singapore after the implementation of CEPT scheme for model 2 and before the global financial crisis hits in U.S economy. Among these three countries, the strongest presence of PPP is found between Malaysia and Singapore where it carried both correctly signed and statistically significant variables. The strong evidence of PPP at this period has suggested that the Malaysia’s economy remains strong enough to cushion the effect of this recession due to its diversification economic policy.