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Purchasing Power Parity among Developing Countries and their Trade-Partners. Evidence from Selected CEEC and Implications for their Membership of EU

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  • Nikolaos Giannellis

    (University of Crete, Department of Economics, Rethymno, Greece)

  • Athanasios P. Papadopoulos

    (University of Crete, Department of Economics, Rethymno, Greece)

Abstract

The purpose of the paper is twofold. Firstly, we test the validity of the PPP hypothesis for selected CEEC (Czech Republic, Hungary, Poland and Slovak Republic). Secondly, we attempt to define those countries’ trade linkages between Euro Area, US and the rest of the world. By applying univariate unit root tests as well as a multivariate cointegration test, we find stronger evidence of PPP from the latter test. Moreover, any failure to accept PPP cannot be attributed to structural breaks, apart from one case (between Czech Republic and EU). In overall, there is evidence of strong-form PPP in 6 out of the 8 cases, while for the rest two, weak-form PPP is accepted. Thus, we confirm PPP as a long run equilibrium baseline for these exchange rates per EURO. Furthermore, the fact that PPP holds between these countries and Euro Area indicates absence of trade frictions and other barriers. The implied well-developed trade relations are consistent with those countries’ entry into EMU.

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Bibliographic Info

Article provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.

Volume (Year): 9 (2006)
Issue (Month): 1 (Summer)
Pages: 39-56

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Handle: RePEc:ekn:ekonom:v:9:y:2006:i:1:p:39-56

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Web page: http://www.ekonomia.ucy.ac.cy/
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  1. Sabate, Marcela & Gadea, Maria Dolores & Serrano, Jose Maria, 2003. "PPP and structural breaks. The peseta-sterling rate, 50 years of a floating regime," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 613-627, October.
  2. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
  3. Vogelsang, Timothy J., 1997. "Wald-Type Tests for Detecting Breaks in the Trend Function of a Dynamic Time Series," Econometric Theory, Cambridge University Press, vol. 13(06), pages 818-848, December.
  4. repec:cup:etheor:v:13:y:1997:i:6:p:818-49 is not listed on IDEAS
  5. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February.
  6. Venus Khim-Sen Liew, 2003. "The Validity of PPP Revisited: An Application of Non-linear Unit Root Test," International Finance 0308001, EconWPA.
  7. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
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Cited by:
  1. Juan Carlos Cuestas, 2009. "Purchasing power parity in Central and Eastern European countries: an analysis of unit roots and nonlinearities," Applied Economics Letters, Taylor & Francis Journals, vol. 16(1), pages 87-94.
  2. Stazka, Agnieszka, 2008. "International parity relations between Poland and Germany: a cointegrated VAR approach," MPRA Paper 24057, University Library of Munich, Germany.
  3. Zorica Mladenović & Kosta Josifidis & Slađana Srdić, 2013. "The Purchasing Power Parity in Emerging Europe: Empirical Results Based on Two-Break Analysis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(2), pages 179-202, April.

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