1.1 Research objectives
Testing the PPP hypothesis is important since it is used, implicitly or explicitly, at least as a long-run relationship, in much of current international monetary economics. For example, early monetary models of the exchange rate assume continuous purchasing power parity, whilst sticky-price exchange rate models of the kind originally developed by Dornbusch (1976) allow the exchange rate to deviate from purchasing power parity in the short-run, although it is retained as a long-run equilibrium condition. Despite all that, the existence of the long-run equilibrium of purchasing power parity is still a puzzle. So the purpose of this research is to provide some further tests for long run PPP hypothesis.
Several objectives are expected to be achieved in the research:
i. To have a comprehensive understanding the importance about purchasing power parity.
ii. To provide different models to testing the long run PPP hypothesis.
iii. To collect data that is relevant to the research.
iv. To find empirical evidences of whether the long run PPP hypothesis exists.
v. Compared each model to provide a more correct empirical result.