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Long Span Unit Root Test Of Purchasing Power Parity: The Case Of Croatia

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  • Josip Tica

    (Faculty of Economics and Business, University of Zagreb)

Abstract

Using unit root test, hypothesis of purchasing power parity in Croatia is tested with the data spanning from 1952 to 2003. Although “the power problem” suggests that at least 75 annual observations of the real exchange rate is required to reject the null hypothesis with 50% probability, unit root test technique with only 51 annual observation for Croatia has rejected unit root hypothesis. Furthermore, using simple, autoregressive models estimated on the data, we show that univariate equations explain 20-55 percent of the in-sample variation in real exchange rates, although the degree of short-run persistence was high in certain periods. The econometric estimates imply a half-life of shocks to the real exchange rate of about 0.9 years for mark-kuna, 2.2 years for dollar-kuna and 1.2 years for lira-kuna.

Suggested Citation

  • Josip Tica, 2006. "Long Span Unit Root Test Of Purchasing Power Parity: The Case Of Croatia," Ekonomski pregled, Hrvatsko društvo ekonomista (Croatian Society of Economists), vol. 57(12), pages 856-880.
    • Handle: RePEc:hde:epregl:v:57:y:2006:i:12:p:856-880
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    Citations

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    Cited by:

    1. Maican, Florin G. & Sweeney, Richard J., 2013. "Real exchange rate adjustment in European transition countries," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 907-926.
    2. Robert J. Sonora & Josip Tica, 2008. "Structural breaks and Purchasing Power Parity in the CEE and Post-War former Yugoslav States," EFZG Working Papers Series 0804, Faculty of Economics and Business, University of Zagreb.

    More about this item

    Keywords

    real exchange rate; purchasing power parity; the power problem; unit root; long span test;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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