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Testing the Purchasing Power Parity: Evidence from the New EU Countries

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  • Minoas Koukouritakis

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

Abstract

This paper examines the validity of the purchasing power parity between each of the twelve new EU countries vis-�-vis the Eurozone. Using the Johansen cointegration methodology for a period that begins from the mid-1990s and allowing for a structural break for the countries that joined the EU on May 2004, it is found that there is a long-run equilibrium relationship among the nominal exchange rate, the domestic prices and the foreign prices, for all the new EU countries. The evidence also suggests that the PPP vector enters the cointegration space for Bulgaria, Cyprus, Romania and Slovenia, which means that only for these countries the long-run PPP vis-�-vis the Eurozone is verified. For the rest of the new EU countries the long-run PPP is violated, may due to the fact that the currencies of these countries have been pegged to the euro and cannot reflect the inflation differences vis-�-vis the Eurozone.

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Bibliographic Info

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0720.

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Length: 14 pages
Date of creation: 17 Apr 2007
Date of revision:
Handle: RePEc:crt:wpaper:0720

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Keywords: Purchasing Power Parity; EU Enlargement; Cointegration; Structural Break; Symmetry and Proportionality.;

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References

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  1. Bent Nielsen & Soren Johansen and Rocco Mosconi, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Economics Series Working Papers 2000-W22, University of Oxford, Department of Economics.
  2. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  3. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  5. Lothian, James R. & Taylor, Mark P., 2000. "Purchasing power parity over two centuries: strengthening the case for real exchange rate stability: A reply to Cuddington and Liang," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 759-764, October.
  6. Ebru Guven Solakoglu, 2006. "Testing purchasing power parity hypothesis for transition economies," Applied Financial Economics, Taylor & Francis Journals, vol. 16(7), pages 561-568.
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Cited by:
  1. Ahlgren, Niklas & Juselius, Mikael, 2009. "Tests for Cointegration Rank and the Initial Condition," Working Papers 539, Hanken School of Economics.
  2. Chang, Tsangyao & Chiu, Chi Chen & Tzeng, Han Wen, 2011. "Revisiting Purchasing Power Parity for Nine Transition Countries Using the Rank Test for Nonlinear Cointegration," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 19-30, June.
  3. Diana Sadoveanu & Nicolae Ghiba, 2012. "Purchasing Power Parity: Evidence From Four Cee Countries," Journal of Academic Research in Economics, Spiru Haret University, Faculty of Accounting and Financial Management Constanta, vol. 4(1 (March)), pages 80-89.
  4. 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.
  5. Nicolae Ghiba, 2011. "Purchasing Power Parity Influence On Real Exchange Rate Behavior In Romania," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 524-536, December.
  6. Oguz OCAL, 2013. "Purchasing Power Parity in the Case of Romania: Evidence from Structural Breaks," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 973 - 976.
  7. Chang, Tsangyao & Tzeng, Han-Wen, 2011. "Long-run purchasing power parity with asymmetric adjustment: Further evidence from nine transition countries," Economic Modelling, Elsevier, vol. 28(3), pages 1383-1391, May.
  8. Václav Žďárek, 2012. "An Empirical Investigation of the Purchasing Power Parity Hypothesis in European Transition Countries," Prague Economic Papers, University of Economics, Prague, vol. 2012(3), pages 257-276.
  9. Ali Acaravci & Ilhan Ozturk, 2010. "Testing Purchasing Power Parity in Transition Countries: Evidence from Structural Breaks," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(27), pages 190-198, February.

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