Real Exchange Rates and Purchasing Power Parity in South Asia

Abstract

The paper investigates the time series properties of seven South Asian currencies' real exchange rates using ADF and PP unit root tests. The results show that the null hypothesis of a unit root (indicating non-stationarity) is rejected in only 2 out of 21 cases for the ADF test and 2 cases for the PP test. This suggests that the real exchange rates of these South Asian currencies are non-stationary, contradicting the Purchasing Power Parity (PPP) theory, which predicts that real exchange rates should be stationary.