TESTING THE PURCHASING POWER PARITY BETWEEN THE HASHEMITE KINGDOM OF JORDAN AND ITS MAJOR TRADING PARTNERS Anwar Salameh Gasaymeh*, Lee Chin and M. Azali Department of Economics, University Putra Malaysia, 43400 UPM, Serdang, Selangor Darul Ehsan, Malaysia Abstract This study examines the validity of Purchasing Power Parity (PPP) and investigates the market integration between The Hashemite Kingdom of Jordan and its major trading partners namely, Japan, United Kingdom, Tunisia, Morocco, Switzerland, Israel, Pakistan, Turkey, Sudan and Iran. Unit root tests, Johansen cointegration test and vector error correction model (VECM) were employed to test the data covering the period of 1990Q1-2006Q4. 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 seven countries namely, Japan, UK, Switzerland, Israel, Pakistan, Tunisia and Morocco and other three countries does not have cointegration relationship. For the VECM, it is found that the error correction terms (ECTs) for Jordan-Japan, Jordan-UK, Jordan-Switzerland, Jordan-Israel, Jordan-Pakistan Jordan-Tunisia, and Jordan-Morocco carried the expected sign. 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. Last but not least, all the models passed all the diagnostic checking. As a conclusion, these results provide evidence on PPP model hold in the long run and the Jordanian economy is integrated with these seven countries.
Available at: http://works.bepress.com/anwar_gasaymeh/1/