Functional forms and PPP: new evidence for eight Asian countries

This article applies the extended Box-Cox model to test functional forms of purchasing power parity (PPP) for eight selected Asian countries. Both the CPI and the PPI are considered. The relative price is the major determinant of the nominal exchange rate except for Malaysia when the CPI is used. The widely used double-log form for PPP can be rejected in seven of the eight countries when the CPI is used and in six of the eight countries when the PPI is used. The unitary elasticity cannot be rejected for Korea when the CPI is used and can be rejected for other cases. Hence, most countries have a nonlinear functional form of PPP and exhibit a nonunitary elasticity.