Does Purchasing Power Parity Hold for Garment Export-Oriented Developing Countries?

AbstractDuring the last two decades, Bangladesh, India, Pakistan and Sri Lanka have experienced phenomenal export earnings due to the growth of their export-oriented garment industries. Over time, the movement in exchange rates has influenced the export performance of these countries. Purchasing power parity (PPP) is the first step in understanding what drives the exchange rate in an economy. This study, therefore, examines the validity of PPP for the above four developing countries. The results could be used as a tool to aid policy-makers in monitoring and ensuring the exchange rate policies for garment export growth prospects of these countries. Because PPP deviation decreases at a very slow rate, we conduct the tests on PPP for a 55-year sample period in order to detect mean reversion in the data. Similar studies used 8- and 35-year sample periods. Furthermore, using real exchange rate unit root tests, this study considers structural changes over a long period, which is lacking in previous studies on PPP. In this study, the test results show that the real exchange rates of Bangladesh, India, Pakistan and Sri Lanka are not constant. The empirical evidence indicates that long-run PPP does not hold for the sample countries