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European exchange rate regimes and purchasing power parity: An empirical study on eleven eurozone countries

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  • Huang, Chao-Hsi
  • Yang, Chih-Yuan

Abstract

It is widely believed that following the adoption of the euro, long run purchasing power parity (PPP) is more likely to hold within the euro countries. By applying the panel unit root test of Pesaran (2007) to real exchange rate data of eleven euro countries for the sample period of January 1957 to May 2013, we find that, contrary to the above intuition, the evidence for the mean-reverting in real exchange rates is much weaker in the post-1998 euro period than in the pre-euro period. In contrast, we find that for the four countries not using the euro: Norway, Sweden, Switzerland, and the UK, the evidence for the mean-reverting in real exchange rates is strong in both the pre- and post-euro (post-1998) periods. Moreover, through our panel estimation of the error correction model using the common correlated effects (CCE) estimators a la Pesaran (2006), we find that the flexibility of nominal exchange rates is crucial for the adjustment of real exchange rates to PPP.

Suggested Citation

  • Huang, Chao-Hsi & Yang, Chih-Yuan, 2015. "European exchange rate regimes and purchasing power parity: An empirical study on eleven eurozone countries," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 100-109.
  • Handle: RePEc:eee:reveco:v:35:y:2015:i:c:p:100-109
    DOI: 10.1016/j.iref.2014.09.008
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bergin, Paul R. & Glick, Reuven & Wu, Jyh-Lin, 2017. "“Conditional PPP” and real exchange rate convergence in the euro area," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 78-92.
    2. Fidora, Michael & Giordano, Claire & Schmitz, Martin, 2017. "Real exchange rate misalignments in the euro area," Working Paper Series 2108, European Central Bank.
    3. Zhang, Zhibai & Bian, Zhicun, 2015. "Absolute purchasing power parity in industrial countries," MPRA Paper 66241, University Library of Munich, Germany.
    4. repec:rjr:romjef:v::y:2017:i:4:p:166-181 is not listed on IDEAS
    5. Zhang, Zhibai, 2015. "Convergence of absolute purchasing power parity," MPRA Paper 64486, University Library of Munich, Germany.
    6. repec:eee:ecolet:v:158:y:2017:i:c:p:62-66 is not listed on IDEAS
    7. Nikolaos Giannellis & Minoas Koukouritakis, 2016. "Eurozone's Leader and its Followers: Are their Markets Integrated Enough?," Working Papers 1607, University of Crete, Department of Economics.
    8. Jiang, Chun & Jian, Na & Liu, Tie-Ying & Su, Chi-Wei, 2016. "Purchasing power parity and real exchange rate in Central Eastern European countries," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 349-358.
    9. repec:eee:jpolmo:v:39:y:2017:i:5:p:942-962 is not listed on IDEAS
    10. Georgios Loukopoulos & Dimitrios Antonopoulos, 2015. "Purchasing Power Parity: A Unit Root, Cointegration and VAR Analysis in Emerging and Advanced Countries," Business and Economic Research, Macrothink Institute, vol. 5(1), pages 262-279, June.
    11. repec:eee:reveco:v:49:y:2017:i:c:p:211-222 is not listed on IDEAS

    More about this item

    Keywords

    Nominal exchange rate regime; Purchasing power parity; Real exchange rate; Panel unit root test; Error correction model;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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