Does Long – run Purchasing Power Parity Hold?

Recent development in econornetrics has enabled the researchers to re-examine the hypothesis of Purchasing Power Parity (PPP). It is expected that in the long run purchasing power parity would hold for any country. And rightly so, some of the researchers have found favorable results that support the hypothesis. This paper tries to explore the long run dynamics of PPP for Bangladesh. It uses the bilateral real exchange rate for Bangladesh and USA and found that the PPP in the long run doesn't hold. The result is robust in a sense that the paper has used the two popular method in testing the long run relationship e.g. residual based cointegration and vector autoregressive cointegration technique to explore the phenomenon. The possible reasons for no long run relationship may be due the trade imbalances and trade barriers that exist between the countries.