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Does purchasing power parity hold following the launch of the euro? Evidence from the panel unit root test

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  • Yi-Hua Wu
  • Eric Lin

Abstract

Using a richer panel data set with more representative price indexes, this article adopts Pesaran's (2007) panel unit root test to study the validity of Purchasing Power Parity (PPP) across the eurozone countries both before and after the launch of the euro in 1999. We find that PPP holds before the introduction of the single currency, whereas it fails to hold after 1999. Our result is consistent with the finding in Engel and Rogers (2004) and Rogers (2007) that there is no longer a tendency to support the law of one price following the birth of the euro.

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  • Yi-Hua Wu & Eric Lin, 2011. "Does purchasing power parity hold following the launch of the euro? Evidence from the panel unit root test," Applied Economics Letters, Taylor & Francis Journals, vol. 18(2), pages 167-172.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:2:p:167-172
    DOI: 10.1080/13504850903442970
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    Cited by:

    1. Huang, Chao-Hsi & Yang, Chih-Yuan, 2015. "European exchange rate regimes and purchasing power parity: An empirical study on eleven eurozone countries," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 100-109.
    2. Nikolaos Giannellis & Minoas Koukouritakis, 2016. "Eurozone's Leader and its Followers: Are their Markets Integrated Enough?," Working Papers 1607, University of Crete, Department of Economics.
    3. Mücahit Aydın, 2019. "Investigation of the Validity of Purchasing Power Parity Hypothesis with Fourier Unit Root Tests: The Case of Turkey," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 30(0), pages 35-48, June.
    4. Giannellis, Nikolaos & Koukouritakis, Minoas, 2017. "Competitiveness divergence in the Eurozone: The need for symmetric adjustment," Journal of Policy Modeling, Elsevier, vol. 39(5), pages 942-962.

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