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The Validity of Purchasing Power Parity in Central and Eastern European Countries: A Rolling Nonlinear Unit Root Test

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  • Veli Yilanci

Abstract

The main aim of this paper is to examine the validity of the purchasing power parity (PPP) hypothesis for eight Central and Eastern European countries using both Kapetanios et al. (KSS) and rolling-KSS unit root tests. By employing the rolling-KSS unit root test, we aim to determine when the real exchange rates become non-stationary or nonlinear. The results of the KSS unit root test show that the PPP hypothesis is valid only for Romania while the results of the rolling-KSS unit root test reveal that the PPP hypothesiscan be rejected only for Poland in the all subsamples. On the other hand, we have found evidence of the validity of PPP for the remaining countries. Comparatively, the real exchange rates of Bulgaria and Romania were found to be characterized by nonlinearity in more subsamples in the rolling-KSS unit root test.

Suggested Citation

  • Veli Yilanci, 2012. "The Validity of Purchasing Power Parity in Central and Eastern European Countries: A Rolling Nonlinear Unit Root Test," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 25(4), pages 973-986, January.
    • Handle: RePEc:taf:reroxx:v:25:y:2012:i:4:p:973-986
    DOI: 10.1080/1331677X.2012.11517542
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