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Purchasing power parity with flexible Fourier stationary test for Central and Eastern European countries

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  • Hsu-Ling Chang
  • De-Chih Liu
  • Chi-Wei Su

Abstract

This study applies stationary test with a Fourier function proposed by Enders and Lee (2004, 2009) to test the validity of long-run Purchasing Power Parity (PPP) to assess the nonstationary properties of the Real Exchange Rate (RER) for seven Central and Eastern European Countries (CEECs). We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true data generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of PPP from the nonlinear point of view and provide robust evidence clearly indicating that the PPP holds true for all CEECs. Our findings point out their exchange rate adjustment is mean reversion towards PPP equilibrium values in a nonlinear way.

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  • Hsu-Ling Chang & De-Chih Liu & Chi-Wei Su, 2012. "Purchasing power parity with flexible Fourier stationary test for Central and Eastern European countries," Applied Economics, Taylor & Francis Journals, vol. 44(32), pages 4249-4256, November.
    • Handle: RePEc:taf:applec:44:y:2012:i:32:p:4249-4256
    DOI: 10.1080/00036846.2011.587791
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    Cited by:

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    2. Fumitaka FURUOKA, 2014. "Does Hysteresis Exist in Unemployment? New Findings from Fourteen Regions of the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(1), pages 59-78, February.
    3. Milan Deskar-Škrbiæ & Antonija Buljan & Mirna Dumèiæ, 2020. "Real interest rate convergence and monetary policy independence in CEE countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 349-380.
    4. Fatih Çiftci, 2024. "The Purchasing Power Parity Approach: Theory, Literature, and Evidence from the ADF-Based and KPSS-Based Tests for the Case of Turkiye," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 11(2), pages 115-157, July.
    5. Tie-Ying Liu & Chi-Wei Su & Xu-Zhao Jiang, 2016. "Is China’S Urbanization Convergent?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(05), pages 1-18, December.
    6. Zixiong Xie & Shyh-Wei Chen & An-Chi Wu, 2023. "Real interest rate parity in the Pacific Rim countries: new empirical evidence," Empirical Economics, Springer, vol. 64(3), pages 1471-1515, March.
    7. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Boršič, Darja, 2013. "Real interest parity in Central and Eastern European countries: Evidence on integration into EU and the US markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 163-180.
    8. Khraief, Naceur & Shahbaz, Muhammad & Heshmati, Almas & Azam, Muhammad, 2020. "Are unemployment rates in OECD countries stationary? Evidence from univariate and panel unit root tests," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    9. Furuoka, Fumitaka, 2014. "Unemployment hysteresis in Central Asia," MPRA Paper 60323, University Library of Munich, Germany.
    10. Claudiu Tiberiu Albulescu & Dominique Pépin & Aviral Kumar Tiwari, 2016. "A RE-EXAMINATION OF REAL INTEREST PARITY IN CEECs USING ‘OLD’ AND ‘NEW’ SECOND-GENERATION PANEL UNIT ROOT TESTS," Bulletin of Economic Research, Wiley Blackwell, vol. 68(2), pages 133-150, April.
    11. Claudiu Tiberiu Albulescu & Dominique Pepin & Aviral Kumar Tiwari, 2014. "A re-examination of real interest parity in CEECs using old and new generations of panel unit root tests," Papers 1403.3627, arXiv.org.
    12. Su, Chi-Wei & Chang, Hsu-Ling & Chang, Tsangyao & Yin, Kedong, 2014. "Monetary convergence in East Asian countries relative to China," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 228-237.
    13. Wen Zhang & Hsu-Ling Chang & Chi-Wei Su, 2014. "Do real interest rates converge across Latin american countries?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(2), pages 117-130, August.

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