Testing Purchasing Power Parity (PPP) to examine Economic Openness of Australian Economy

This paper examines Purchasing Power Parity (PPP) with a variation of the Vector Error Correction Model (VECM) which guesses that an affiliation exists among Real Exchange Rate, Interest Rate, and Inflation Rate in Australia. The objective of this assessment is to research how much the picked macroeconomic elements influence the Real Exchange Rate of Australia by using the Johansen long-run testing way to deal with management co-integration. The paper shows enchanting estimations. ADF unit root test has been adopted to determine whether broad data is fixed or not. By testing the Johansen test for co-integration, the paper shows the association between Real Exchange Rate, Interest Rate, and Inflation Rate in Australia. VECM is also adopted to test the short-run components of the Real Exchange Rate work. Cumulative Sum (CUSUM) and Cumulative Sum of Square (CUSUMQ) have been used to test the quality of the model. The results show short-run and long-run relationship among Real Exchange Rate, Inflation Rate, and Interest Rate. The results showed that the Inflation Rate adversely influences the Real Exchange Rate, notwithstanding, Interest Rate has a Positive effect. Additionally, the Inflation Rate has a free causal relationship with Real Exchange Rate, be that as it may, Interest Rate has a unidirectional relationship. This paper prescribes the likelihood to improve their Real Exchange Rate by reducing the Inflation Rate and growing the Interest Rate