Purchasing Power Parity Hypothesis in Developing Economies: Some Empirical Evidence from Sri Lanka

The purchasing power parity (PPP) hypothesis has attracted a lot of attention from academics and policy-makers particularly, during the recent float. Most previous studies used data from the developed world. This study examines the validity of the PPP hypothesis using data during the recent float from Sri Lanka. In contrast to previous studies, we use unit root tests which take into account unknown means and trends in the real exchange rates as well as graphical techniques. Both these techniques overwhelmingly reject the empirical validity of the PPP hypothesis for Sri Lanka. The results from widely-used unit root tests, however, provide mixed evidence. We attribute these inconclusive results to the low power of the widely-used unit root tests and their inability to account for unknown trends and means in the real exchange ratesReal exchange rates, Sri Lanka, Purchasing power parity, ERS tes

Purchasing Power Parity Hypothesis in Developing Economies:Some Empirical Evidence from Sri Lanka

Purchasing power parity (PPP) hypothesis has attracted a lot of attention from academics and policy-makers particularly, during the recent float. Most previous studies used data from the developed world. This study examines the validity of the PPP hypothesis using data during the recent float from Sri Lanka. In contrast to previous studies, we use unit root tests which take into account unknown means and trends in the real exchange rates as well as graphical techniques. Both these techniques overwhelmingly reject the empirical validity of the PPP hypothesis for Sri Lanka. The results from widely-used unit root tests, however, provide mixed evidence. We attribute these inconclusive results to the low power of the widely-used unit root tests and their inability to account for unknown trends and means in the real exchange rates.Real exchange rates, Sri Lanka, Purchasing power parity, ERS test, DF-GLS test, US dollar

Efficiency of the Foreign Exchange Market of Papua New Guinea During the Recent Float

This paper examines the validity of the efficient market hypothesis (EMH) for the foreign exchange market of Papua New Guinea (PNG) using data on spot exchange rates for four major foreign currencies during the recent float. The unit root test results indicate that all the four exchange rates are random walks supporting the weak-form of the EMH. However, the Johansen multivariate cointegration test, the Granger causality test and variance decomposition analysis provide evidence that there are long-run as well as short-run predictable relationships among the spot exchange rates, refuting the validity of EMH in its semi-strong form. Further, evidence is found that the Australian dollar plays a vital role in driving the movements of exchange rates in PNG. These results have important implications for participants in the foreign exchange market and policy makers in PNG.Efficient market hypothesis, Papua New Guinea, foreign exchange market, Japanese yen, Variance decomposition

The Sri Lankan Rupee and Purchasing Power Parity during the Current Floating Period

This paper examines the empirical validity of purchasing power parity (PPP) hypothesis in a Sri Lankan context using exchange rates for six foreign currencies during the period January 1986 to November 2000. Both graphical and econometric methods are used in the analysis. Graphical analysis indicates that the spot exchange rates for the currencies except for the Indian rupee follow the respective PPP exchange rates closely during certain time periods only and real exchange rates are non-stationary thus violating a necessary condition for the PPP to hold. The results of econometric methods are also consistent with those of the graphical methods. In addition, the symmetry and proportionality hypotheses implied by the PPP were rejected. These results refute the validity of PPP hypothesis to Sri Lanka. While these results have implications for policy makers, they may be corroborated using other econometric techniques such as cointegration and error-correction models and nonlinear models.Sri Lankan rupee, Purchasing power parity, Japanese yen, real exchange rates

The Efficiency of Emerging Stock Markets: Empirical Evidence from the South Asian Region

This paper examines weak form efficiency in the stock markets of India, Sri Lanka, Pakistan and Bangladesh; and the linkages between these four markets. The Augmented Dicky Fuller (ADF-1979), the Phillip-Perron (PP-1988), the Dicky-Fuller Generalized Least Square (DF-GLS 1996) and Elliot-Rothenber-Stock (ERS – 1996) tests are used to examine stock market efficiency. Weak form efficiency is supported by the classical unit root tests, however, it is not strongly supported for Bangladesh under the DF-GLS and ERS tests. The cointegration and Granger causality tests indicate a high degree of interdependence between the South Asian stock markets.South Asia, India, Sri Lanka, Pakistan, Bangladesh, unit root tests, stock markets, market efficiency

EFFICIENCY OF FOREIGN EXCHANGE MARKETS: A DEVELOPING COUNTRY PERSPECTIVE

This study tests weak and semi-strong form efficiency of the foreign exchange market in Sri Lanka using six bilateral foreign exchange rates during the recent float. Weak-form efficiency is examined using unit root tests while semi-strong form efficiency is tested using co- integration and Granger causality tests and variance decomposition analysis. Results indicate that the Sri Lankan foreign exchange market is consistent with the weak -form of the Efficient Market Hypothesis. However, the results provide evidence against the semi - strong version of the Efficient Market hypothesis. These results have important implications for government policy makers and participants in the foreign exchange market of Sri Lanka.Efficient market hypothesis, Sri Lanka, foreign exchange market, Japanese yen, Variance decomposition

Exchange Rate Pass-Through to Manufactured Import Prices: The Case of Japan

This paper examines the exchange rate pass-through to yen based manufactured import prices of Japan using asymmetric unit root and cointegration tests and asymmetric models. Due to sticky prices, for example, there are reasons to believe that the degree of pass-through depends on whether the exchange rate appreciates or depreciates. The sample used in this study covers the period January 1975 to June 1997. Using two state regime switching models, the estimated pass-through coefficients corresponding to appreciation and depreciation of the currency are found to be 98 percent and 83 percent respectively; these coefficients are shown to be significantly different, particularly in the post recession period. Moreover, we have shown that the recession in Japan in the 1990s has significantly affected the exchange rate passthrough relationship particularly when the yen depreciates and that the proposition that exchange rate depreciation and appreciation have systematic asymmetric effects on exchange rate pass-through coefficient. Forcing appreciations and depreciations to have the same effects on the import prices does not appear to uncover the true underlying exchange rate pass through relationship.Exchange rate pass-through, Japan, threshold autoregression.

Role of Exchange Rate Volatility in Exchange Rate Pass-Through to Import Prices: Some Evidence from Japan

This paper investigates the effect of exchange rate volatility on the degree of exchange rate pass-through in Japan for the period January 1975 to June 1997. Although several studies put forward theoretical arguments for the volatility-domestic import price relationship, only a very few studies produced empirical evidence. The volatility of contractual currency based exchange rate index returns was modelled using GARCH-type processes with skewed student t-distribution, capturing the typical nature of exchange rate returns. Using a three-state regime switching threshold model, we examine the response of import prices, the degree of pass-through in particular, to different volatility regimes, low, medium and high. The results show that the exchange rate pass- through coefficient is significantly different across all three volatility regimes only during recession.

Catalysing scale-up of maternal and newborn health innovations in Ethiopia

Scaling-up the innovation across a large geographical area as part of the Community Based Newborn Care package produced challenges, yet there have also been positive and enabling factors in Ethiopia. IDEAS wanted to understand what helps and what hinders the scale-up of community-based maternal and newborn health (MNH) innovations, both within and beyond implementation partner areas, and how scale-up can be catalysed. IDEAS and its partners carried out a case study of an MNH innovation in Ethiopia with its roots in the Community Based Interventions for Newborns in Ethiopia (COMBINE) project which enables Health Extension Workers (HEWs) to administer antibiotics to manage neonatal sepsis at community level. This was evaluated through a randomised controlled trial. The innovation was facilitated by Save the Children USA, through Saving Newborn Lives (SNL), and was initially implemented by HEWs and the Health Development Army in 19 districts ('woredas') of Ethiopia. From late 2013, the innovation was being scaled-up to 92 woredas as one of nine components of Phase One of the Ethiopian Government’s Community Based Newborn Care (CBNC) package. This summary presents evidence from the study and identifies both enablers and barriers to scale up and key actions needed to catalyse scale up