PURCHASING POWER PARITY BASED ON EFFECTIVE EXCHANGE-RATE AND COINTEGRATION - 25 LDCS EXPERIENCE WITH ITS ABSOLUTE FORMULATION

With the development of cointegration technique, the Purchasing Power Parity (PPP) theory has received renewed attention. Most studies have tested the theory by using data from developed countries (DCs) and som e high-inflation, less-developed countries (LDCs). They have mostly re jected its empirical validity. In this paper we use the concept of eff ective exchange rate and quarterly, data over 1973-88 to examine the e xperience of 25 LDCs. For most countries we found little empirical sup port for the PPP.