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Testing the Relative PPP Hypothesis in CEE States – Does the ‘PPP Puzzle’ Still Keep up?

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  • Vaclav Zdarek

    ()
    (ŠKODA AUTO University)

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    Abstract

    This paper is focused on testing the relative version of the purchasing power parity (PPP). It tries to shed light on this so called “PPP puzzle” for a set of transition countries – twelve new EU Member States. Since results of similar studies in the literature have been ambiguous, a set of econometrics methods is employed: univariate (standard) tests (URT s), robust versions of URT s including high-powered ones – the non-linear Kapetanios, Sollis (non-linear adjustments) and Bierens’ test (non-linearities in trends). Three definitions of exchange rates (bilateral currency pairs) are utilised: for the euro, the US dollar and the CPI-based real effective exchange rate (REER). Due to limitations as regards to the availability of the data for our set of countries, quarterly data for the period 1995:Q1–2011:Q1 are used. The results of conventional linear do not provide a crystal-clear answer, more robust URT s at least partially do in favour of the PPP hypothesis. In addition, once the source of non-linearities has been controlled for (structural changes), the results show stochastic stationarity of all three series.

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    File URL: http://www.vsfs.cz/periodika/acta-2012-02.pdf
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    Bibliographic Info

    Article provided by University of Finance and Administration in its journal ACTA VSFS.

    Volume (Year): 6 (2012)
    Issue (Month): 2 ()
    Pages: 108-135

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    Handle: RePEc:prf:journl:v:6:y:2012:i:2:p:108-135

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    Related research

    Keywords: real exchange rates; unit root tests; exponential smooth transition autoregressive model; new EU Member States;

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