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Purchasing Power Parity and the European Single Currency: Some New Evidence

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  • Maria Christidou

    ()
    ( Department Of Economics, University Of Macedonia, Thessaloniki, Greece)

  • Theodore Panagiotidis

    ()
    ( Department Of Economics, University Of Macedonia, Thessaloniki, Greece; The Rimini Centre for Economic Analysis (RCEA), Italy)

Abstract

The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 19_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:19_10

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Keywords: Purchasing Power Parity; half-life; nonlinear unit roots; panel unit roots; heterogeneity; cross-section dependence;

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References

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  1. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  2. Su Zhou & Mohsen Bahmani-Oskooee & Ali M. Kutan, 2008. "Purchasing Power Parity before and after the Adoption of the Euro," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(1), pages 134-150, April.
  3. Bart Hobijn & Philip Hans Franses & Marius Ooms, 2004. "Generalizations of the KPSS-test for stationarity," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 58(4), pages 483-502.
  4. Koedijk, C.G. & Tims, B. & van Dijk, M.A., 2004. "Purchasing Power Parity and the Euro Area," ERIM Report Series Research in Management ERS-2004-025-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  5. Kaddour Hadri, 1999. "Testing For Stationarity In Heterogeneous Panel Data," Research Papers 1999_04, University of Liverpool Management School.
  6. Kaddour Hadri & Eiji Kurozumi, 2008. "A Simple Panel Stationarity Test in the Presence of Cross-Sectional Dependence," Global COE Hi-Stat Discussion Paper Series gd08-016, Institute of Economic Research, Hitotsubashi University.
  7. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  8. Alan M. Taylor, 2000. "A Century of Purchasing-Power Parity," NBER Working Papers 8012, National Bureau of Economic Research, Inc.
  9. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
  10. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
  11. Claude Lopez & David H. Papell, 2007. "Convergence to Purchasing Power Parity at the Commencement of the Euro," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 1-16, 02.
  12. Lucio Sarno, 2005. "Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 673-708, August.
  13. Gadea, Maria-Dolores & Montanes, Antonio & Reyes, Marcelo, 2004. "The European Union currencies and the US dollar: from post-Bretton-Woods to the Euro," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1109-1136.
  14. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
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Cited by:
  1. Tsoulfidis, Lefteris & Tsaliki, Persefoni, 2011. "Classical competition and regulating capital: theory and empirical evidence," MPRA Paper 51334, University Library of Munich, Germany, revised 2013.
  2. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2011. "Unit-root and stationarity testing with empirical application on industrial production of CEE-4 countries," MPRA Paper 29648, University Library of Munich, Germany.
  3. 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.

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