Co-Integration Tests and the Long-Run Purchasing Power Parity: A Case Study of India and Pakistan Currencies

This is a study of the application of the purchasing power parity propositions to the interesting cases of India & Pakistan through the Co-integration method. The results of the Co-integrations of both the nations demonstrate that the exchange rates are more in tandem with price movements supporting PPP theorem. This is interesting given the near-and-far off relationship between India and Pakistan owing to historical and contemporary factors which does not hold an irrational exchange rate. It is good for the two important developing nations to expand their economic and trade relationship which is a win-win situation for both countries. The study also points to the need of the two countries, with extensive poverty still in spite of their nearly seven decades’ history of their development, to better manage their economies and currencies, the latter from fall and fall, which is dimming the international standing of their currencies. The study is a modest contribution to the literature on the Purchasing Power Parity theory with reference to the “special” cases of India and Pakistan.