ANALYSIS OF THE RELATIONSHIP BETWEEN PURCHASING POWER PARITY, EXCHANGE RATE AND INFLATION IN TERMS OF THE DEPRECIATION RATE OF MYANMAR CURRENCY

This empirical study examines the cause and effect and the relationship between purchasing power parity, exchange rate, and inflation in terms of the depreciation rate of Myanmar currency which is Kyats in terms of US dollar during 1990- 2015. This research concerns the pros and cons of the depreciation rate of Myanmar currency as an increased amount of export of Myanmar yields literally a less amount of import. In this situation, Myanmar suffers from a negative effect of the depreciation rate of Myanmar currency (in terms of US dollars). The advantages of depreciates rate of currency in reducing the government debt, shrinking the trade deficit, and achieving the economic policy of a country should be given previously over the higher export rate. The analysis would undergo time-series for 26 observations. The dataset would be tested under the Levin, Lin and Chu test, Augmented Dickey-Fuller test and Phillip-Peron test for stochastic trend. At the 01% - 05 % significant level, the hypothesis is that a variable has unit root test for the Purchasing Power Parity (PPP), the Inflation (INF) and the Exchange rate (Ex) are rejected at 1st difference level. They are found to be moderately correlated to each other. The dataset estimated for analysis by equation shows the PPP has negative long-run relationship with both the INF and the Ex. Furthermore, there is seen to be no short-run relationship between PPP and Ex but PPP is short-run related to INF. Under Granger Causality test to find cause and effect between the variables, the results are that (1) PPP Granger Causes Ex, but Ex does not, (2) INF Granger Causes PPP, but PPP does not, and (3) Ex and INF do not Granger Cause each other. Keywords: Purchasing Power Parity, Exchange Rate, Inflation, Granger