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Purchasing Power Parity among Developing Countries and their Trade-Partners. Evidence from Selected CEEC and Implications for their Membership of EU

  • Nikolaos Giannellis

    (University of Crete, Department of Economics, Rethymno, Greece)

  • Athanasios P. Papadopoulos

    (University of Crete, Department of Economics, Rethymno, Greece)

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 univariate unit root tests as well as 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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Article provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.

Volume (Year): 9 (2006)
Issue (Month): 1 (Summer)
Pages: 39-56

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Handle: RePEc:ekn:ekonom:v:9:y:2006:i:1:p:39-56
Contact details of provider: Web page: http://www.ekonomia.ucy.ac.cy/
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  1. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February.
  2. Venus Khim-Sen Liew, 2003. "The Validity of PPP Revisited: An Application of Non-linear Unit Root Test," International Finance 0308001, EconWPA.
  3. 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.
  4. repec:cup:etheor:v:13:y:1997:i:6:p:818-49 is not listed on IDEAS
  5. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
  6. 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.
  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.
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