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Purchasing Power Parity among developing countries and their trade-partners. Evidence from selected CEECs and Implications for their membership of EU

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Author Info
Nikolaos Giannellis (University of Crete)
Athanasios P. Papadopoulos (University of Crete)

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Abstract

The purpose of the paper is twofold. Firstly, we test the validity of the PPP hypothesis for selected CEEC (Czech Republic; Hungary; Poland and Slovak Republic). Secondly, we attempt to define those countries’ trade linkages between Euro Area; US and the rest of the world. By applying both univariate unit root and a multivariate cointegration test, we find stronger evidence of PPP from the latter test. Moreover, any failure to accept PPP cannot be attributed to structural breaks, apart from one case (between Czech Republic and EU). In overall, there is evidence of strong-form PPP in 6 out of the 8 cases, while for the rest two, weak-form PPP is accepted. Thus, we confirm PPP as a long run equilibrium baseline for these exchange rates per EURO. Furthermore, the fact that PPP holds between these countries and Euro Area indicates absence of trade frictions and other barriers. The implied well-developed trade relations are consistent with those countries’ entry into EMU.

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Publisher Info
Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 55.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:55

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Related research
Keywords: PPP; Unit Root; Structural Breaks; Cointegration; Developing Countries;

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Venus Khim-Sen Liew, 2003. "The Validity of PPP Revisited: An Application of Non-linear Unit Root Test," International Finance 0308001, EconWPA. [Downloadable!]
  2. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Blackwell Publishing, vol. 11(3), pages 436-452, 08. [Downloadable!] (restricted)
  3. repec:cup:etheor:v:13:y:1997:i:6:p:818-49 is not listed on IDEAS
  4. Vogelsang, Timothy J., 1997. "Wald-Type Tests for Detecting Breaks in the Trend Function of a Dynamic Time Series," Econometric Theory, Cambridge University Press, vol. 13(06), pages 818-848, December. [Downloadable!]
  5. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April. [Downloadable!] (restricted)
  6. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February. [Downloadable!] (restricted)
  7. Sabate, Marcela & Gadea, Maria Dolores & Serrano, Jose Maria, 2003. "PPP and structural breaks. The peseta-sterling rate, 50 years of a floating regime," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 613-627, October. [Downloadable!] (restricted)
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  1. Juan Carlos Cuestas, 2007. "Purchasing Power Parity In Central And Eastern European Countries: An Analysis Of Unit Roots And Nonlinearities," Working Papers. Serie AD 2007-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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