Purchasing Power Parity Between Vietnam and United States
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Abstract
This study uses the annual data of consumer price index, exchange rate and inflation rates spanned from 1986 to 2014 in order to observe whether the PPP hypothesis holds between Vietnam and United States. First, the findings come out based on the graph aproach which is used in order to examine both short-run and long-run PPP. Second, the Engle-Granger approach is applied in order to test for the long – run PPP again. In the short-run, the result from the graph approach indicates that PPP holds during hyperinflation years. After hyperinflation period, the exchange rate and relative price tend to be close together in several years. This finding in the short-run seems to reveal a good guide in the long-run PPP. Both graph and the Engle-Granger approach show the same result in the long –run. Upon the stationary testing, the finding of the Engle-Granger approach demonstrates that residuals from the estimation are stationary, therefore, there is an existence of a long-run relationship between nominal and real exchange rate. In other way, PPP seems to hold between Vietnam and United States. The result leads to the implication that multinational companies should set the same prices for products in Vietnam and United States market based on PPP. Otherwise, investors can gain profit through arbitrage strategies.
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