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Purchasing Power Parity in the Transition: The Case of the Romanian Leu Against the Dollar

  • David Barlow
  • Roxana Radulescu
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    This article uses co-integration analysis to test purchasing power parity for the Romanian leu against the US dollar. The fact that the purchasing power parity (PPP) hypothesis is not rejected leads to the conclusion that the real appreciation of the leu against the dollar over the transition has not been due to an appreciation of the equilibrium real exchange rate. Rather it is simply the consequence of the leu being devalued beyond the equilibrium level at the start of reform and slowly returning to its constant equilibrium real rate. There is evidence that the adjustment to equilibrium has fallen almost entirely on the price level, so that a major consequence of the excessive undervaluation has been higher inflation.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/14631370120116725
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    Article provided by Taylor & Francis Journals in its journal Post-Communist Economies.

    Volume (Year): 14 (2002)
    Issue (Month): 1 ()
    Pages: 123-135

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    Handle: RePEc:taf:pocoec:v:14:y:2002:i:1:p:123-135
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    1. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
    2. Corbae, Dean & Ouliaris, Sam, 1988. "Cointegration and Tests of Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 508-11, August.
    3. Begg, David, 1998. "Pegging Out: Lessons from the Czech Exchange Rate Crisis," CEPR Discussion Papers 1956, C.E.P.R. Discussion Papers.
    4. Panagiotis Liargovas, 1999. "An Assessment of Real Exchange Rate Movements in the Transition Economies of Central and Eastern Europe," Post-Communist Economies, Taylor & Francis Journals, vol. 11(3), pages 299-318.
    5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    6. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
    7. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
    8. Mark P. Taylor & Ronald MacDonald, 1991. "Exchange Rate Economics: A Survey," IMF Working Papers 91/62, International Monetary Fund.
    9. Bahmani-Oskooee, Mohsen, 1993. "Purchasing power parity based on effective exchange rate and cointegration: 25 LDCs' experience with its absolute formulation," World Development, Elsevier, vol. 21(6), pages 1023-1031, June.
    10. Rudiger Dornbusch, 1986. "Exchange Rate Economics: 1986," NBER Working Papers 2071, National Bureau of Economic Research, Inc.
    11. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
    12. Jeffrey A. Frankel, 1985. "International capital mobility and crowding-out in the U.S. economy: imperfect integration of financial markets or of goods markets?," Proceedings, Federal Reserve Bank of St. Louis, pages 33-74.
    13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    14. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
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