Purchasing power parity theory and its validity in Pacific Island countries

Abstract

Among the 14 Pacific island countries (PICs), which are members of the inter- governmental organization known as Pacific Islands Forum, six countries have

independent currencies five of them, namely Fiji, Samoa, Solomon Islands, Tonga and Vanuatu have fixed exchange rate regimes and the sixth country namely Papua New Guinea has a flexible exchange rate regime. The other eight are dollarized economies, having adopted one of the currencies of Australia, New Zealand and the United States. This paper investigates whether the purchasing parity power theory holds in regard to five countries under fixed exchange rate regimes. Our findings show that long-run PPP hypothesis hold for all five PICs.