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Purchasing power parity in Central and Eastern European countries: an analysis of unit roots and nonlinearities

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Listed author(s):
  • Juan Carlos Cuestas

Abstract

The aim of this article is to analyse the empirical fulfilment of purchasing power parity (PPP) in a number of Central and Eastern European countries. For this purpose we apply two different unit root tests in order to control for two sources of nonlinearities, i.e. Bierens (1997) and Kapetanios et al. (2003). We find that PPP holds in most of these countries once account has been taken of nonlinear deterministic trends and smooth transitions.

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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 16 (2009)
Issue (Month): 1 ()
Pages: 87-94

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Handle: RePEc:taf:apeclt:v:16:y:2009:i:1:p:87-94
DOI: 10.1080/13504850802112252
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  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • F15 - International Economics - - Trade - - - Economic Integration

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  1. Peter C.B. Phillips & Sam Ouliaris & Joon Y. Park, 1988. "Testing for a Unit Root in the Presence of a Maintained Trend," Cowles Foundation Discussion Papers 880, Cowles Foundation for Research in Economics, Yale University.
  2. 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.
  3. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February.
  4. 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 1015-1042, November.
  5. David Barlow, 2003. "Purchasing Power Parity in Three Transition Economies," Economic Change and Restructuring, Springer, vol. 36(3), pages 201-221, September.
  6. Perron, Pierre & Phillips, Peter C. B., 1987. "Does GNP have a unit root? : A re-evaluation," Economics Letters, Elsevier, vol. 23(2), pages 139-145.
  7. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
  8. Mariam Camarero & Juan Carlos Cuestas & Javier Ordonez, 2008. "Nonlinear trend stationarity of real exchange rates: the case of the Mediterranean countries," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 30-46.
  9. Dimitrios Sideris, 2006. "Purchasing Power Parity in economies in transition: evidence from Central and East European countries," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 135-143.
  10. Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001. "Likelihood-based cointegration tests in heterogeneous panels," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 1-41.
  11. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
  12. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-879, August.
  13. Hegwood, Natalie D & Papell, David H, 1998. "Quasi Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-289, October.
  14. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  15. Bierens, Herman J., 1997. "Testing the unit root with drift hypothesis against nonlinear trend stationarity, with an application to the US price level and interest rate," Journal of Econometrics, Elsevier, vol. 81(1), pages 29-64, November.
  16. Dirk Te Velde, 2001. "Balance of payments prospects in EMU," NIESR Discussion Papers 178, National Institute of Economic and Social Research.
  17. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02.
  18. Shang-Jin Wei & David C. Parsley, 1995. "Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Papers 5032, National Bureau of Economic Research, Inc.
  19. Mariam Camarero & Juan Carlos Cuestas & Javier Ordonez, 2006. "Purchasing Power Parity versus the EU in the Mediterranean countries," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 157-167.
  20. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-311, July.
  21. Nikolaos Giannellis & Athanasios P. Papadopoulos, 2006. "Purchasing Power Parity among Developing Countries and their Trade-Partners. Evidence from Selected CEEC and Implications for their Membership of EU," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 9(1), pages 39-56, Summer.
  22. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, vol. 56(6), pages 1397-1417, November.
  23. Krugman, Paul R., 1978. "Purchasing power parity and exchange rates : Another look at the evidence," Journal of International Economics, Elsevier, vol. 8(3), pages 397-407, August.
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