Testing Balassa-Samuelson Model to Examine Purchasing Power Parity (PPP) of Bangladesh

Abstract

This paper has investigated Balassa-Samuleson hypothesis in Bangladesh to examine purchasing power parity (PPP) during 1972-2016. The broad objective of this study is to analyse whether purchasing power parity (PPP) holds in Bangladesh or not during the analysed period. Johansen Long Run Co integration test has been used through regression analysis to test the long run relationship among real exchange rate, relative price, relative productivity, government share and terms of trade of Bangladesh during 1972-2016. Descriptive statistics of the variables have also been shown. ADF Unit Root test has been used to test the stationary state of panel data. ECM Model, CUSUM & CUSUMQ tests have been applied to test the stability of the model. Johansen Long Run Co integration test has showed that there exists a long run relationship among the variables and purchasing power parity (PPP) does not hold in Bangladesh. It recommends better understanding of volatility and persistence of real exchange rate as transaction costs and nonlinearity matter for purchasing power parity (PPP).