The linkage between relative population growth and purchasing power parity: empirical evidence from selected countries
Salim, R. and Hassan, K. (2009) The linkage between relative population growth and purchasing power parity: empirical evidence from selected countries. In: In Zia Haqq (ed.) Proceedings of annual London conference on “money, economy and management”, 9 - 10 July, London, UK pp. 1-14.
Relative population growth affects relative prices through the so-called Balassa-Samuelson (BS) effect and that in turn impacts PPP. This paper empirically investigates the relationship between PPP exchange rate and relative population growth in a panel of 80 selected countries in the world. Following the BS hypothesis this paper argues that relative population growth affects nominal wages that impact price levels and thereby impacts PPP. Using panel unit root and panel cointegration tests the empirical results show that there is stable relationship between PPP exchange rate and relative population growth in these selected countries in the long run. These empirical findings suggest that population growth have an important role in exchange rate determination through PPP.
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