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Panel Estimations of PPP and Relative Price Models for CEECs: Lessons for Real Exchange Rate Modelling

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  • Lukasz Rawdanowicz
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    Abstract

    The paper contributes to the recent empirical literature on real exchange rates in CEECs. Instead of estimating a complete model, the PPP and relative price models (two main components of the real exchange rate) are investigated separately. All empirical tests are conducted in the heterogonous dynamic panel framework. The unbalanced panel includes generally nine CEECs (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia) over 1993-2002. Models are estimated by two econometric methods: FMOLS and PMGE. The trend appreciation of nominal exchange rates deflated with tradables prices is found in most of CEECs. The appreciation was mainly driven by tradables inflation. Formal econometric tests, based on the explicit estimation of constrained coefficients of PPP model, do not support the strong version of relative PPP. This outcome is invariant to the use of bilateral or multilateral exchange rates, different numeraire currency or different specifications of the PPP model with regard to dependent variable. Evidence is provided that the trend appreciation is explained by the non-tradables processing component effect. It is demonstrated that this mechanism plays an important role also in determination of relative prices.

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    File URL: http://www.case-research.eu/upload/publikacja_plik/2687014_Sa276%2012.05.pdf
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    Bibliographic Info

    Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0276.

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    Length: 46 Pages
    Date of creation: 2004
    Date of revision:
    Handle: RePEc:sec:cnstan:0276

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    Keywords: exchange rate models; PPP; panel estimations; CEECs;

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    Cited by:
    1. Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series wp793, William Davidson Institute at the University of Michigan.
    2. García Solanes, José & Torrejón-Flores, Fernando, 2008. "The Balassa-Samuelson Hypothesis in Developed Countries and Emerging Market Economies: Different Outcomes Explained," Economics Discussion Papers 2008-14, Kiel Institute for the World Economy.
    3. García-Solanes, José & Sancho-Portero, F. Israel & Torrejón-Flores, Fernando, 2008. "Beyond the Balassa-Samuelson effect in some new member states of the European Union," Economic Systems, Elsevier, vol. 32(1), pages 17-32, March.

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