A COINTEGRATION ANALYSIS FOR THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM MIDDLE EAST COUNTRIES

Abstract

This paper examines the validity of Purchasing Power Parity between Jordan and its major trading partners namely, Turkey, Qatar, Iraq, United Arab Emirates and Saudi Arabia. Unit root tests, Johansen cointegration test were employed to test the data covering the period of 2000Q1-2020Q4. The unit root tests demonstrated that all variables are integrated of order one. The results of cointegration tests showed that there exists a cointegrating relationship between exchange rate, domestic and foreign price levels for the selected countries does have a cointegration relationship. This suggests that whenever there is a deviation from the equilibrium cointegrating relationship, exchange rate interacts in a dynamic fashion in adjusting to restore long-run equilibrium. As a conclusion, these results provide evidence on Purchasing Power Parity model hold in the long run and the Jordanian economy is integrated with these countries.