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

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Author Info
Minoas Koukouritakis () (Department of Economics, University of Crete, Greece)

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Abstract

This paper examines the validity of the purchasing power parity between each of the twelve new EU countries vis-à-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-à-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-à-vis the Eurozone.

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File URL: http://www.soc.uoc.gr/econ/wpa/docs/Koukouritakis_PPP.pdf
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Publisher 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
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Handle: RePEc:crt:wpaper:0720

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

Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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References listed on IDEAS
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  1. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249. [Downloadable!]
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  2. 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. [Downloadable!] (restricted)
  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. [Downloadable!]
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  4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February. [Downloadable!] (restricted)
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  5. Ebru Guven Solakoglu, 2006. "Testing purchasing power parity hypothesis for transition economies," Applied Financial Economics, Taylor and Francis Journals, vol. 16(7), pages 561-568, April. [Downloadable!] (restricted)
  6. Søren Johansen, 1994. "The role of the constant and linear terms in cointegration analysis of nonstationary variables," Econometric Reviews, Taylor and Francis Journals, vol. 13(2), pages 205-229. [Downloadable!] (restricted)
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